Perspectives on the global economic meltdown

[Muppalla]

Meanwhile, if you are currently invested in the US equities mkt, you may wanna reconsider your investmt there. This just in:
Insiders sell like there's no tomorrow (CNN Money)
Which means there prolly is no tomorrow. They, the insiders, would know. No?

This really tells something. The folks who are the real reason for artificially bumping up stocks are playing safe. The public will again be duped. It is imminent that stocks will crash pretty soon.

[sanjaykumar]

Err one does not need insider trading to anticipate that the stock market is gonna dive and stay down for 15 years after the stimulus is spent and the bills come due (the psychological pressure of a $15 trillion debt, http://www.usdebtclock.org/ will be significant).

Once upon a time you dressed so fine
You threw the bums a dime in your prime, didn't you?
People'd call, say, "Beware doll, you're bound to fall"
You thought they were all kiddin' you
You used to laugh about
Everybody that was hangin' out
Now you don't talk so loud
Now you don't seem so proud
About having to be scrounging for your next meal.

How does it feel
How does it feel
To be without a home
Like a complete unknown
Like a rolling stone?

[shyam]

Look at the graph below. France has been more dependent on financial business than all other OECD countries for a long. But it never appeared so to the outside world.

[Neshant]

Looks like powers that be are trying to set the IMF up to destroy wealth of people around the world through inflation. Someone needs to stop the central bankers before they destroy the hard work & savings of ordinary folk.

-------------------

The New Inflation Threat

http://www.kitco.com/ind/Nathan/aug312009.html

Late on a Friday in August, when most people around the world were not looking, the international monetary system, in an unprecedented move, evolved. We were notified by the IMF of the following:

Aug. 28 (Bloomberg) -- The International Monetary Fund said it today pumped about $250 billion into foreign-exchange reserves worldwide, acting on an April call from leaders of the Group of 20 nations to boost global liquidity.

[Paul]

The evolution of the Sethiji to the CEOji



The legendary Mammon alone could have scripted an ode to power. The most powerful CEOs of India Inc sure wield influence by virtue of wealth. And that’s certainly not a novelty. Money and influence have gone hand-in-hand across the millennia.

In the mid-17 th century, Jain jeweller-banker Shantidas Jawhari petitioned the Mughal emperor Shahjahan and got a temple restored to him that Aurangzeb (Shahjahan’s patricidal son), the then governor of Gujarat, had forcibly converted into a mosque. When Aurangzeb ultimately seized power, instead of taking revenge for the slight, it was the all-powerful emperor who had to placate Jawhari.

Around the same time, Surat merchant Virji Vohra, counted among the world’s richest merchants , lent money to the English. The merchants of Surat were akin to the Venetians in India and used their wealth to command absolute control.

When Aurangzeb, in financial doldrums, sought an interest-free loan from the Surat merchant-bankers at the imperial camp, they simply refused on the grounds that it would set a bad precedent. It wasn’t just in the Mughal era either; the power of paisa has been the power through the ages, to the extent that even when real power was perceived to be flowing from the blade of a sword, it was the lure of the lucre that was the real motivation.

Throughout india’s history, power has flowed from diverse factors — class, caste, religion, and even gender — but as a separate class, the men of Mazuma have always had a special place in the various power dynamics that have emerged and evolved over the centuries. It was, nevertheless , a gradual shift. The merchants’ relationship with the ruling class and also their standing in society became stronger over a period of time as trade and commerce took centre-stage .

Back in the Harappan culture as the gahapatis (landowning householders) transformed into setthis (entrepreneurs of trade and finance), they became more prominent , though they still had a long way to go before wielding power. Later, during the Mauryan era, the artisan associations became large and gradually metamorphed into guilds and according to Romila Thapar’s The Penguin History of Early India, these guild leaders become quite powerful.

Things turned around between 200 and 300 BC when the guilds exerted power , though their heads still did not seek political will. However, the nexus with royalty provided a political edge to their activities, notes the eminent historian . It was towards the 10th century that shresthis (merchants) gained power. Some wealthy merchants of the 13th century, such as Vastupala and Jagadu, even became respected members of the urban council at Anahilapattana, the Chalukya capital.

With the dawn of the Mughal era, the business community came of age and traders gained a place in the power hierarchy . Trade as a whole gained much more respectability as a profession. Even royalty couldn’t desist from dabbling in trade. Jehangir’s mother, Maryam Zamani, for instance , conducted extensive overseas trade and so did Nur Jahan and Jahanara.

There were several others like them, says Abrahm Early in The Mughal World. Not to be left behind in profiteering and maintaining a royal monopoly in commodities like salt, the emperor too stepped in. As the power of the Mughals began to wane, the merchants slowly established power centres of their own as the Europeans began increasing their foothold.

Towards the dusk of the Mughal era, emperor Bahadur Shah Zafar even had to borrow money from Delhi moneylenders — Lala Saligram, Bhawani Shanker and the richest among them, Lala Chunna Mal — for his son Prince Mirza Jawan Bakht’s wedding.

The power pendulum started swinging towards the merchants as the British East India Company and other European colonisers started flexing their muscles. The conquest of India was determined by the wealth it had, and as the sniff game continued, the Europeans used guns and roses to get a grip over the struggling Mughals and feudal chieftains.

The Battle of Plassey in 1757 set a precedent as the British East India Company came to dominate the sub-continent , a subject that gloriously comes to life in the Satyajit Ray film, Shatranj Ke Khiladi. The Mughals became irrelevant and the merchants came to be known as the new Mughals of India. In 1832, Thomas Metcalfe, announced in a letter, “I have renounced my former allegiance to the house of Timur.”

In The Last Mughal, William Dalrymple writes, ‘In the year 1833, the emperor’s name was removed from East India rupees and when Lord Auckland visited Delhi, he didn’t even bother to pay a courtesy call on Akbar Shah 11, the reigning Mughal’ .

In the days of the Raj, as India shifted to the industrial mode, there emerged a set of businessmen — Parsis from Mumbai, Marwaris from Calcutta and Delhi — who would build new businesses in India under British patronage. The most prominent among them was a man who was born in 1839 in Navsari, Gujrat, who not only built India’s largest business empire but also stood tall as an astute nation builder: Jamsetji Nusserwanji Tata.

It’s a feat that nearly two-and-a-half centuries later, his descendent Ratan Naval Tata remains India’s most powerful CEO while globally old dynasties like Rockefellers, Krupps and Agnellis are languishing or have ceased to exist.

A few of the leading Indian businessmen , like Birlas and Bajaj, were involved closely with the freedom struggle too. Mahatma Gandhi even adopted the founder of Bajaj group, Jamnalal Bajaj, as his ‘fifth’ son. Gandhi happened to be living at the house of another businessman close to him when he was assassinated — the Birla patriarch , Ghanshyam Das Birla. In 1910, Sir Ratan Tata even supported Bapu in his struggle against apartheid in South Africa with generous donations.

After Independence, Indian business houses like Tatas, Birlas, Godrejs, Mahindras , Modis, Dalmias and Shrirams would build businesses under the ‘licence permit raj’ that benefited the chosen few who had proximity to political parties and flourished under their patronage.

Independent India’s first minister for commerce and industry, and later the finance minister, was TT Krishnamachari, the founder of the TTK Group. Politicians and prophets of profit were becoming inseparable . In the ensuing period, some notable groups emerged making money much more influential than the monarch — Dhirubhai Hirachand Ambani’s Reliance Group was one such.

At first wave of liberalisation in 1991, Indian business witnessed another power shift — the rise of a new breed of entrepreneurs like Sunil Bharti Mittal, NR Narayana Murthy, Azim Premji, who began riding new-age businesses and became distinctive voices in the society. As revenues grew on the sails of globalisation , so did the archetypal do-gooder CEO image in a world that was increasingly becoming flat.

The need for corporate governance knitted companies with the thread of transparency. And openness with vendors, shareholders and stakeholders at large made the CEO voices more voluble, whether in communities or at policy-making . Clearly, greed is not good anymore. It’s the greatest good that matters and that’s why a Tata is at the top.

Looks like the global economic slowdown is causing the CG to revert back to the Sethji.....this aspect has not been thought enough. The East India co. usurped the power of the Sethji and it getting back to the natural state of affairs.

[svinayak]

What is the URL
Any related Links

[shravan]

US Fires Opening Salvo In Trade Wars With China

U.S. to Impose Tariff on Tires From China
By Peter Whoriskey and Anne Kornblut
Washington Post Staff Writers - Saturday, September 12, 2009

In one of his first major decisions on trade policy, President Obama opted Friday to impose a tariff on tires from China, a move that fulfills his campaign promise to "crack down" on imports that unfairly undermine American workers but risks angering the nation's second-largest trading partner.

[Neshant]

I do believe the next shot to be fired will be China & Japan agreeing to conduct trade in each other's currency and not the dollar.

[Hari Seldon]

I do believe the next shot to be fired will be China & Japan agreeing to conduct trade in each other's currency and not the dollar.

MaoA... MaoA.... Wonder what Dilli will do at that time..

Anyways, that scenario transpiring is unlikely - couldn't happen so far between even Russia and PRC. Tokya under the new gubmint might just spring a shocka, I would imagine. Interesting times ahead.

In any case, both PRC and Japan are export powerhouses - verily dependent on keeping their currencies low against the USD. The only way they can do that is to keep buying more USD. Don;t see either or both of them together offering enough consumption demand to rival the khanate in the medium term.

[Ameet]

Thousands march in Washington to protest spending

http://www.boston.com/news/nation/artic ... _spending/

[shravan]

Ameet,

What is Tea Party ?

[ArmenT]

shravan: It is a reference to the Boston Tea Party which was one of the earliest political protests in the quest for American Independence. The original Boston Tea Party was to protest taxation without representation (i.e.) Americans wanted to decide what they were to be taxed about by their own representatives, rather than England declaring what items were taxable or not. Tea was one of those items that was heavily taxed by England and the East India company had a monopoly. After a lot of opposition to the taxes, a bunch of Americans disguised as Native Americans went into the East India company ships in Boston harbor and tossed boxes of tea aboard. The fallout from this incident eventually led to the revolutionary war and the founding of the United States of America.

Modern day "Tea Parties" protest excessive government spending.

[shravan]

ArmenT,

Thank for the info. Never knew there was so much history behind Tea Party.

And thanks for creating brfdictionary.

[Hari Seldon]

The Coming Consequences of Banking Fraud

Recommended read for all D&G ayatollahs, wannabees and critics.

On the miraculous levitation of equity markets in anglosaxonia

For many weeks in August, just four stocks accounted for as much as 40% of composite volume on the NYSE: Citigroup, Bank of America (BAC), Freddie Mac (FRE) and Fannie Mae (FNM). In early 2007, Citigroup, Fannie Mae and Freddie Mac accounted for roughly 1% -3% of NYSE volume, a far cry from its recent 35%+ collective weight of the composite NYSE volume. Remember that this huge volume anomaly persisted not just for one day but for weeks on end during August. If Citigroup, Bank of America, Fannie Mae and Freddie Mac were a pharmaceutical collective that just discovered a cure for cancer and AIDS, then such volume anomalies would make sense. However, such massive trading volumes, as a percent of composite volume for the entire NYSE index, makes zero sense for companies, that for all intents and purposes, are on government bailout lifelines. It makes no sense, that is, unless massive free-market intervention is occurring in an attempt to save these firms.

Again, when viewed through the “fraud prism”, such activity makes complete sense. It is obvious that the “Rise of the Machines” has created markets that are now dominated by computerized high frequency trading programs that can execute trades as quickly as 0.5 milliseconds and have as their sole purpose the creation of short-term market distortions driven by statistical arbitrage that can be used to game the system and cheat their clients. Though this link describes how this scheme works in commodity markets for those that have been following the New York Stock Exchange, the use of high frequency trading programs to game the system at the expense of the retail investor has been glaringly obvious especially in the trading behavior exhibited this past summer.

On the incestuous old boy network at the summit level:

If one can not see the connection between Presidents, Prime Ministers and the banking families that rule Central Banks, one merely needs to open up a newspaper and follow their lives after they leave government office. It is not just a coincidence that ex-British Prime Minister Tony Blair, after leaving office, took a part-time consulting job with JP Morgan’s Jamie Dimon that reportedly pays him $5 million per year as well as another well-paid consulting position with Zurich Financial Services. In office, Mr. Blair was a consultant to the banking oligarchs in secret; out of office, he is free to be a consultant publicly. And one can be certain that current UK Prime Minister Gordon Brown and US President Barack Obama will be offered very considerable salaries and fees by the world’s top financial oligarchs as thanks for their current and past service to them once they leave office as well (especially Gordon Brown, for selling out his countrymen and selling more than half of England’s bank reserves to ensure that the financial oligarchs could maintain the US dollar as the de-facto international currency for 10 additional more years than it deserved to hold this status).

On the flak D&G ayatollahs have been taking of late in the face of the rising stock mkt and round-the-corner recovery back to happy times a la 2006:

In the end, what is the most frustrating facet of these huge con games executed by the financial oligarchs is that the group of people that this article is most intended to help is often the group of people that will take most offense to this article and most steadfastly refuse to see the truth. Instead, they will only realize the truth when the economic future unfolds to the blueprint of those of us the media labels as “gloom and doomers” because we base our predictions on reality instead of fantasy and lies. Instead of labeling us as “gloom and doomers”, if the media at large ever conducted an unbiased analysis of the predictions of the “gloom and doomers” for the past 3 years, they would discover that the “gloom and doomers” have been spectacularly accurate in the majority of their calls while the financial demagogues they continually fawn over (that only serve the interests of the bankers) have been spectacularly wrong in the vast majority of their predictions. Yet, those that serve the international banking cartel with glowing and rosy predictions of economic recovery never suffer the negative consequences of being wrong all the time as the mass media all too happily continues to provide the largest public platform and the loudest voices to these people. Perhaps, if it is accurate to label “gloom and doomers” as realists, then one should label the optimists that make their calls based upon perpetrated fraud as banking shills and cogs in the investing machine, for their societal contribution of greatest significance is an opiate cocktail for the masses that is a mixture of deceit and lies mixed with unbridled optimism.

Ilargi warns ominously of just how terrible things can become so very quickly.

People, on an individual, community and societal basis, will make decisions based on the illusion that growth is back and the recession but an unpleasant memory. Resources that might still have been used to build some kind of shelter from the storm are instead incessantly being wasted not on building solid foundations but on decorative gargoylic elements for the rooftop, never mind that the supporting walls have crumbled beyond any call at recognition or redemption. Are you realy hungry enough for good tidings to set your own house on fire?

What this will lead to, and indeed already has, is levels of poverty, both in scope and in depth, which we haven't seen in a long, long time. And which, unless we act to halt their advance, will blow our communities and societies to smithereens from the inside.
....
It's very simply about minimum requirements for a functional society, period. You can't have tens of millions of people being unemployed and/or living below the poverty line for extended lengths of time without resorting to oppressive measures of physical force aimed at keeping down those who have landed in your gutters. And if you would choose that option, one that many Americans would, knowingly or not, support, then freedom takes on the meaning of "the freedom to repress others", or even "the freedom to repress whoever you can", and down the line, as the single logical outcome, Orwell's "some animals are more equal than others".

While elements of this notion may seem to have much appeal to many of those who remain standing for now, don't be fooled. Unless you want to see soldiers and tanks overflowing your neighborhoods, not providing for your weakest is not an option. And no, you won't feel just as happy about your life, and that of your families, if and when on your way to work you’re forced to pass by children starving by the side of the road while clasping a shotgun in your lap. A functioning society, whatever political label you might prefer to stick on it, is possible only when its members manage to suppress the temptation to take so much for themselves that too little to survive is left for their neighbors.

Awrite, that was a tad extreme and I doubt things'll ever get that bad in the first world. The khanate can and will repudiate all external (and likely internal as well) debt, shut itself into a fortress, make enough to feed and employ itself and prosper way before things go to revolution lengths. The unemployment insurance and medicare like schemes are bribes to keep potential revolutionaries off the streets. The bribes can only continue in an ever more shaky fiat currency.

[Dilbu]

No D&G in khanland, everything TFTA onree. (Keep that bottle of salt nearby)
Economic Confidence Rebounds

Economists and consumers are feeling better about the economy a year after the most frightening moments of the financial crisis. Forecasters surveyed by The Wall Street Journal, giving the government generally good marks for its handling of the financial crisis, now see employers slowly adding jobs over the next 12 months.

And the latest reading of consumer spirits shows signs of optimism. But most economists still expect the unemployment rate will climb to 10.2%, from today's 9.7%, before falling early next year.

"We are in a technical recovery, but risks remain abundant," said Diane Swonk of Mesirow Financial. "It will still take some luck and skill to get Main Street to feel some of the relief Wall Street has felt."

Main Street is beginning to feel some relief, though, according to the Reuters/University of Michigan preliminary reading of consumer sentiment for September, released Friday.

The index rose to 70.2 in September from to 65.7 in August, the first increase since June. Consumers felt better about current conditions, and about the future.

"[There's] just this general feeling that the worst is behind us in the economy," said Conrad DeQuadros, an economist for RDQ Economics. "That's probably offsetting some of the factors that dampen consumer sentiment," such as rising oil prices and an economy that's still shedding jobs .

[Neshant]

Consider... Robert Rubin who was ex-treasury secretary was given a high paying job at Citigroup right after his time in government was up. He got $126 million despite screwing up the company.

Tim Geithner has nowhere near that amount of money and reportedly is (unsuccessfully) trying to sell a house he bought for 1.6 million. He needs the money and probably cannot afford the real estate tax.

Obviously the guy is looking forward to a cushy job as a 'consultant' or 'advisor' in the financial sector after he gets out of his government post.

If you had a 126 million dollar job waiting for you, you would not do anything to annoy your soon-to-be bosses. Its a revolving door scam between government and banks.

Sadly I see the same being perpetrated in India where ex finance minister gets a (well paid) seat at the IMF/World Bank. Its a ploy by foreign powers to bribe the present FMs of a third world country into doing their bidding by holding out the promise of a cushy position later on.

[vina]

A loong one, but definitely worth a big read from Paul Krugman How Did Economists Get it so Wrong?

A good background about all the "religion" and "competing schools" and everything behind e-Con-O-Mix , along with all the politics and mis applied math models (good case of Ketchup economics). Now JNU/DSE/ISI commie ding dongs dont need to smirk. India was a classic case of such equally mis applied math models inflicted on us for 40 years. The difference was, the math /planning models was used to make justifications for the commie economics, while in this case in the West, it was used to make the justification for Nutty ultra liberal models. Enjoy.

The New York Times
Printer Friendly Format Sponsored By

September 6, 2009
How Did Economists Get It So Wrong?
By PAUL KRUGMAN

I. MISTAKING BEAUTY FOR TRUTH

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.

II. FROM SMITH TO KEYNES AND BACK

The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.

This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.

It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. The neoclassical revival was initially led by Milton Friedman of the University of Chicago, who asserted as early as 1953 that neoclassical economics works well enough as a description of the way the economy actually functions to be “both extremely fruitful and deserving of much confidence.” But what about depressions?

Friedman’s counterattack against Keynes began with the doctrine known as monetarism. Monetarists didn’t disagree in principle with the idea that a market economy needs deliberate stabilization. “We are all Keynesians now,” Friedman once said, although he later claimed he was quoted out of context. Monetarists asserted, however, that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions. Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened. Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its “natural” level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment — a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.

Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.

Not all macroeconomists were willing to go down this road: many became self-described New Keynesians, who continued to believe in an active role for the government. Yet even they mostly accepted the notion that investors and consumers are rational and that markets generally get it right.

Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.

III. PANGLOSSIAN FINANCE

In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”

And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

By 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the “efficient-market hypothesis,” promulgated by Eugene Fama of the University of Chicago, which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information. (The price of a company’s stock, for example, always accurately reflects the company’s value given the information available on the company’s earnings, its business prospects and so on.) And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino.”

It’s hard to argue that this transformation in the profession was driven by events. True, the memory of 1929 was gradually receding, but there continued to be bull markets, with widespread tales of speculative excess, followed by bear markets. In 1973-4, for example, stocks lost 48 percent of their value. And the 1987 stock crash, in which the Dow plunged nearly 23 percent in a day for no clear reason, should have raised at least a few doubts about market rationality.

These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.

To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.

But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”

By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.” Since this collapse of the intellectual edifice was also a collapse of real-world markets, the result was a severe recession — the worst, by many measures, since the Great Depression. What should policy makers do? Unfortunately, macroeconomics, which should have been providing clear guidance about how to address the slumping economy, was in its own state of disarray.

IV. THE TROUBLE WITH MACRO

“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end.

Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?

I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.

This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.

Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .

In short, the co-op fell into a recession.

O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.

Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.

Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.

But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.

Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.

By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.

Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.

Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.

But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.

Even so, you might have thought that the differing worldviews of freshwater and saltwater economists would have put them constantly at loggerheads over economic policy. Somewhat surprisingly, however, between around 1985 and 2007 the disputes between freshwater and saltwater economists were mainly about theory, not action. The reason, I believe, is that New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed. At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed’s governing board, declared of the Great Depression: “You’re right. We did it. We’re very sorry. But thanks to you, it won’t happen again.” The clear message was that all you need to avoid depressions is a smarter Fed.

And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about. (They didn’t believe that monetary policy did any good, but they didn’t believe it did any harm, either.)

It would take a crisis to reveal both how little common ground there was and how Panglossian even New Keynesian economics had become.

V. NOBODY COULD HAVE PREDICTED . . .

In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.

Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”

Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.

In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.

Now that the undiagnosed bubble has burst, the true riskiness of supposedly safe assets has been revealed and the financial system has demonstrated its fragility. U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940. So what guidance does modern economics have to offer in our current predicament? And should we trust it?

VI. THE STIMULUS SQUABBLE

Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Fresh­water economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.

But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever.

Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.

During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.

But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.

Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.

Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown.

And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)

Meanwhile, saltwater economists, who had comforted themselves with the belief that the great divide in macroeconomics was narrowing, were shocked to realize that freshwater economists hadn’t been listening at all. Freshwater economists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.

And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.

And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?

The state of macro, in short, is not good. So where does the profession go from here?

VII. FLAWS AND FRICTIONS

Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.

There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.

On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. Larry Summers once began a paper on finance by declaring: “THERE ARE IDIOTS. Look around.” But what kind of idiots (the preferred term in the academic literature, actually, is “noise traders”) are we talking about? Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).

Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.

On the second point: suppose that there are, indeed, idiots. How much do they matter? Not much, argued Milton Friedman in an influential 1953 paper: smart investors will make money by buying when the idiots sell and selling when they buy and will stabilize markets in the process. But the second strand of behavioral finance says that Friedman was wrong, that financial markets are sometimes highly unstable, and right now that view seems hard to reject.

Probably the most influential paper in this vein was a 1997 publication by Andrei Shleifer of Harvard and Robert Vishny of Chicago, which amounted to a formalization of the old line that “the market can stay irrational longer than you can stay solvent.” As they pointed out, arbitrageurs — the people who are supposed to buy low and sell high — need capital to do their jobs. And a severe plunge in asset prices, even if it makes no sense in terms of fundamentals, tends to deplete that capital. As a result, the smart money is forced out of the market, and prices may go into a downward spiral.

The spread of the current financial crisis seemed almost like an object lesson in the perils of financial instability. And the general ideas underlying models of financial instability have proved highly relevant to economic policy: a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse.

Meanwhile, what about macroeconomics? Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.

There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.

VIII. RE-EMBRACING KEYNES

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.

Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”

This article has been revised to reflect the following correction:

Correction: September 6, 2009
Because of an editing error, an article on Page 36 this weekend about the failure of economists to anticipate the latest recession misquotes the economist John Maynard Keynes, who compared the financial markets of the 1930s to newspaper beauty contests in which readers tried to correctly pick all six eventual winners. Keynes noted that a competitor did not have to pick “those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” He did not say, “nor even those that he thinks likeliest to catch the fancy of other competitors.”

[Hari Seldon]

And in waltzes our favorite alarmist D&G high priest......(Drumroll please!).... Sri Sri Ambrose Evans Pritchard. With a knowledge of economic history that rivals a Niall Fergusson (minus the spin) and a penchant for dropping shock shells completely without warning......

Lehman is a footnote in the great East-West globalisation crisis

Sample this:

As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money.

The housing crash has tipped 15m US home owners into negative equity. A third of sub-prime mortgages are in default. Some 7.8pc of all loans backed by the Federal Housing Administration are in foreclosure or 90 days in arrears. This is why the US Treasury had to seize Fannie Mae and Freddie Mac, the $5.3 trillion pillars of US housing. It is not a liquidity crisis. It is a bankruptcy crisis.

Foreclosures reached 358,000 in August alone. More Americans are being evicted each month than during the entire Depression year of 1932.

This is not to pick on America. Variants of the bubble occurred across the Anglosphere, Scandinavia, Holland, Club Med, and east Europe. Defaults will hit with a lag in Europe, but hit they will.

The IMF expects global banks to lose $2.5 trillion by next year. So far they have confessed to $1 trillion.

Whoa. might have to endup bolding the entire piece at this rate. EVP prose tends to have that effect.

You can see why markets and governments both like to blame Lehman Brothers for the "Great Contraction". Such wishful thinking shields investors from the nasty reality that deeper forces are at work: it absolves officialdom from its own destructive role in fixing the price of credit too low for 20 years, luring us into debt.

Hmmm. So twas just a 20-year old problem. I would have thought, going by the experience of the great depression that bubbles and bursts are endemic to the khanomic system itself. Further, Nixon's trashing the gold standard in '73 shows the system was broken, perhaps insolvent in Au terms even then. No?

Anyway, enough carping over split hairs....

Now this may sound a tad repetitious but for the sake of exposure-ing EVP prose, here goes in briefs the story of the global ekhanomic meltdown.

We know why the bubble occurred. Call its Greenspanism.

Central banks rescued assets each time there was a hiccup, but let booms run unchecked. They pulled "real" rates ever lower, creating addiction to monetary stimulus. Larger doses were required with each cycle, until we hit zero, and it is still not enough. Debt burdens rose to records across the OECD.

Couldn't they see that this was cheating: stealing from the future? No, they were seduced by "inflation targeting" – watch goods, ignore assets – just as cheap imports from China rendered the doctrine obsolete.

It always takes ideology to consummate massive error. {A keeper, that.}

Asia in turn caused a global bond bubble by accumulating $5 trillion in reserves (a side effect of holding down currencies to gain export share). Long-term rates collapsed too. The global credit bubble was complete.

But in his inimical ishtyle, Sri EVP gives hope but refuses dope to the export powerhouses of the east...

The Great Game can continue only as long as deficit countries – currently, US (-$628bn), Spain (-$109bn), Italy (-$62bn), France (-$58bn), Britain (-$53bn), Greece (-$42bn), and east Europe – are willing to bankrupt themselves buying Asian goods. Obviously, this is absurd.
...
"Who will replace the US consumer to power global growth?" asked IMF chief Dominique Strauss-Kahn in Friday's Le Monde. "We have left the financial crisis, but we are still in the economic crisis. "

{How quaint. The 'financial crisis' here is == the liquidity crunch that followed the Lehmann collapse almost exactly a year ago. Twas merely a symptom. The disease is insolvency i.e. the ekhanomic crisis talked about here. And twas always there, regardless of the lehmann collapse.}

There is gaping whole in world demand. It is being filled by governments, all nearing the limit of fiscal stimulus. Some have exceeded it: Spain is to raise taxes by 1.5pc of GDP, and Japan's Democrats are retreating from spending pledges. China is trying to plug the gap, belatedly, by ramping up credit 70pc this year, but it will take a cultural revolution to induce the Chinese to spend. The liquidity is leaking into stocks, metals, and property.

Bottomline?

Yes, markets are sizzling, but industrial production is still down 23pc in Japan, 17pc in the eurozone, 13pc in the US and 11pc in Russia. We have a global glut of manufacturing plant. This is why companies will have to slash staff. Don't be deceived: profits can look good at first when firms cut into the bone. It is no strategy for an economy.

[Neshant]

(LINKS ARE NOW FIXED)

Marc Faber on Bloomberg Sept 10th

Part 1 : http://www.youtube.com/watch?v=q1fPRWYGm-U

Part 2 : http://www.youtube.com/watch?v=KmEMLi-j8B4

Part 3 : http://www.youtube.com/watch?v=xo5X4otkF3E

[Hari Seldon]

The Germans are attempting psy-ops now? Against anglospherica itself? Bring it on, I say.

Sample this piece by Der Spiegel in Angrezi titled Doubt worry and fear in NYC and tell me if it won't make the makers of 'Slumdog' proud.

They still remember how things used to be. That's part of the problem. New York's heroes, the men and women who only yesterday considered themselves the knights and conquerors of Manhattan, remember all too well what New York was like in the 1970s -- the era before seven-figure salaries came to the Big Apple.

They remember -- and they see the signs. That's why they're afraid.

Cathy used to be a banker. Today she is homeless and living in Tompkins Square. She thinks about the heroin and the stench. In the 1970s, Cathy had a small apartment not far from here on Orchard Street. It was broken into three times. She remembers the burning cars and broken glass, the plumes of smoke and the cops who shouted "****** you!" every time they lashed out.

Restaurateur Fred Austin says he had the doors taken off the toilet stalls at Katz's restaurant because of the junkies. If they were going to shoot up in front of all his guests, he at least wanted them to feel embarrassed.

Tom Birchard, the owner of the Veselka diner, says he adopted the New York walk in the 1970s: fast, determined, always scanning two blocks ahead, looking behind you every 10 steps or so, staying more than arms-length away from doorways, and crossing the street or even turning around altogether if two or more black men came towards you.

Aside from the murders, the whores and the knowledge that areas like Harlem and the Bronx were strictly out-of-bounds for whites, Mayor Michael Bloomberg says the subway was the worst thing about New York. "The subway was hot and never on time. Everything was damp and grimy, and full of trash," that is how he recalls the days when people went in and never came out again. "It was an inferno."

Wow. Were the services of some of Aroy, AAdiga or Pbidwhy leased to write this sizzling Sh1t, one wonders. Read it all.

Quite over the top so keep the hankeys and salt shakers at the ready.

OTOH, for folks here on BR who've known, lived and loved the big apple, this would feel sad in more ways than one.

Stores are closing or barely scraping by, offering "three suits for $250." No one is buying. "Food traffic" -- taxis ferrying people straight across Manhattan to the coolest restaurants -- has dwindled to a trickle. Theft, violent and drug crimes are on the rise. There are New Yorkers who pretend to be surprised if a bar only accepts cash, say they're going to an ATM, and never return. "Impulse shopping," the practice of popping down to a boutique over lunch, has died a death. 6.5 percent of all the stores in Manhattan are now vacant: a 20-year high. On Fifth Avenue, the Western world's premier shopping district, 15 percent of the shops between 42nd and 49th Street have closed. Even Brooks Brothers has left nothing but boarded-up windows. And scaffolding. And signs: "For sale," "for rent," "for free."

The city's restaurants are advertising "recession dinners": A hot dog and a beer for $5. Suddenly you can get tables again -- anywhere, anytime -- and the concierge will often ring you back and make you an offer. It feels like the end of snobbery.

The potholes are getting bigger. And could it be there are more rats since the collapse of Lehman Brothers? Garbage sacks pile up because restaurants and hotels have to pay for them to be taken away, but would rather save their money. Homeless people wander the streets, apartments remain empty, landlords offer discounts -- unthinkable circumstances just a short time ago, at least here in Manhattan and over in Brooklyn.

[vina]

Well, many many moons ago, when Sovereign Funds were all the rage and how discussions in BR was on how INDIA should set one up itself, I had argued that he entire Sovereign Funds business itself was harebrained , more so in a capital deficit country like India , and especially so because when babus/ clueless fund managers manage such a fund, they will lose their shirt because of information assymmetry.

Well, here goes.. Looks like One of the Global Biggies, the Disneyesque Dubai's crown Jewel Ishtihtmar World is going to bite the dust. Just reading through it is mind boggling!.

[Singha]

wow two keepers one morning. about the burning apts and cars , a couple yahudi pals of mine experienced in the slumdogy parts of boston told me there are many insurance scams. both went to a large univ on north shore of charles river and rented student acco in such places , one said his landlord (slumlord) showed up every month to collect rent in a large black cadillac , a sharp black suit and two hoods in the back seat both with baseball bats. no chi-chi account transfers or cheques accepted - it was pay on time or get roughed up and thrown out asap.
this one slumlord apparently owned around 100 small apts in somerville and had his pays in other traditional 'rough' businesses like car dealerships and garages wherein one needs some street muscle to survive in those areas.

[KarthikSan]

Marc Faber on Bloomberg Sept 10th

Part 1 : http://www.youtube.com/watch?v=xo5X4otkF3E

Part 2 : http://www.youtube.com/watch?v=KmEMLi-j8B4

Part 3 : http://www.youtube.com/watch?v=KmEMLi-j8B4

Neshant...please fix the links. The first one points to Part3 and the next two point to Part2. Thanks.

[kmkraoind]

Dubai’s Trail of Dud Deals Shows Sovereign Wealth Gone Awry

[milindc]

Dubai’s Trail of Dud Deals Shows Sovereign Wealth Gone Awry

kmkraoind, Vina posted the same article 2 posts above..

[svinayak]

Marc Faber on Bloomberg Sept 10th

Neshant...please fix the links. The first one points to Part3 and the next two point to Part2. Thanks.

http://www.youtube.com/watch?v=FFhWIUTF1IM

This is the best interview
Check out what is the future and also the market

http://www.youtube.com/watch?v=rJ8i8FKAwec
http://www.youtube.com/watch?v=DuyL8c_m7Wg
http://www.youtube.com/watch?v=XgNW7nnDAZ0

Marc Faber interviewed by NDTV INDIA
http://www.youtube.com/watch?v=6QWLZLPCNWo

[svinayak]

In the months that followed, Obama recalled, American households lost $5 trillion in wealth and the financial crisis burgeoned into "a full-blown economic crisis," with housing prices plummeting, businesses unable to get credit and the economy shedding an average of 700,000 jobs a month

An Enormous Scale
http://www.nytimes.com/2009/09/14/busin ... 1253073600
The scale of the Fed’s intervention has been staggering. The central bank has acquired more than $700 billion in mortgage-backed securities so far, and officials have said they will buy up to $1.25 trillion — a goal that should take the Fed until early next year. To help Fannie and Freddie raise the money they need to buy mortgages from lenders, the Fed is also buying $200 billion of their bonds.

All told, the government is propping up almost the entire mortgage market and, by extension, the housing industry.

http://news.google.com/news/more?pz=1&n ... SM&topic=h

[Ameet]

Bank exec squats in $12M foreclosure home. At this point you can only

http://www.cnn.com/video/#/video/busine ... uatter.cnn

[Gerard]

Revealed: The ghost fleet of the recession

The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the U.S. and British navies combined but has no crew, no cargo and no destination - and is why your Christmas stocking may be on the light side this year

[SwamyG]

Things started looking better during summer this year. But looks like, after all, it might not be that rosy as things limp back. New York attorney preparing charges on several high-ranking BofA executives concerning the Merrill Lynch acquistion.

[SwamyG]

As wages stagnated, and as the costs of health care and education spiraled higher, easy money filled the gap: shrinking paychecks were masked by an explosion of consumer credit and by a pair of investment manias that made money surge through the American economy — one centered on the supposedly limitless promise of the Internet, the other propelled by faith that real estate values could only climb.

On the backs of these fantasies, the financial system lent out ridiculous sums of money to businesses and homeowners, as if the laws of supply and demand had been repealed.

As wages stagnated, and as the costs of health care and education spiraled higher, easy money filled the gap: shrinking paychecks were masked by an explosion of consumer credit and by a pair of investment manias that made money surge through the American economy — one centered on the supposedly limitless promise of the Internet, the other propelled by faith that real estate values could only climb.

On the backs of these fantasies, the financial system lent out ridiculous sums of money to businesses and homeowners, as if the laws of supply and demand had been repealed.

Easy money generated economic growth and spread riches. Yet when arithmetic reasserted itself, annihilating trillions of dollars in wealth and millions of jobs, the economy was left with a debilitating case of disillusionment: once markets lost faith in make-believe, they starved the economy of capital. Even people who had barely benefited — people like Dorothy Thomas — suffered an outsize share of hurt.

The challenge now confronting American society is how to transition from an era in which we spent and consumed in brazen disregard of traditional limits into a new period in which we live on what we bring home from work. Yet just as Americans most need jobs to rebuild savings and pay off past-due bills, jobs are in exceedingly scarce supply.

http://www.nytimes.com/2009/09/13/busin ... gewanted=2

[Sanjay M]

Economist Warns of Double-Dip Recession

[Singha]

> ghost fleet of Johor

unusual and brilliant article. a scoop because nobody in western media seems to
have reported on it. singapore is 2nd busiest port.

I am sure there's a similar anchorage near hong kong or shenzhen somewhere. johor
bahru might be popular due to its relatively sheltered and calm waters.

[Philip]

Run for cover,it is the end of "THE WORLD"!

Credit crunch signals end of The World for Dubai’s multi-billion dollar property deal
James Mclean in Dubai

England is deserted, Australia and New Zealand have merged, and the man who bought Ireland has killed himself.

They were designed to make Dubai the envy of the world: a series of paradise islands inhabited by celebrities and the super-rich reclaimed from the azure waters of the Arabian Gulf and shaped like a map of the Earth. It was called The World.

As millions of tonnes of rock were dumped into the sea for the foundations, timely leaks suggested that Brad Pitt and Angelina Jolie were to buy Ethiopia, Sir Richard Branson was tipped to occupy England, while Rod Stewart would border him in Scotland.

Instead it has become the world’s most expensive shipping hazard, guarded by private security in fast boats and ringed by warning buoys to keep the curious away. A development that was meant to send Dubai’s star into the firmament of First World cities has been left to the mercy of the waves and the baking winds.

Related Links
Dubai collapse sparks £3bn in legal claims
Official Dubai advice: hold your breath if algae attack
The party’s over in Dubai

Mile after mile of breakwater built from boulders brought hundreds of miles by ship has been laid, but inside its man-made lagoon, work has completely stopped. The expected map of the world of 300 islands is instead a disjointed and desolate collection of sandy blots — a monumental folly just out of sight of Dubai’s shore.

Those who bought into what was the world’s most ambitious building project were not celebrities. Many were more ordinary investors who put down 70 per cent deposits, some of them Anglo-Indians. John O’Dolan, who fronted a consortium that bought Ireland in 2007 for $38 million (£27 million), committed suicide earlier this year. The others have little prospect of seeing a return. Now The World has stopped they can’t get off.

“The World has been cancelled. It doesn’t even look like the world. Basically there is one island that is maintained that is said to be owned by the Sheikh [Dubai’s ruler] and the rest looks like a pile of muck,” said one local property agent.

It is the starkest example of a financing crunch that faces the emirate but many other projects are also in jeopardy. In the United Arab Emirates (UAE), of which Dubai is a part, about $300 billion of building is on hold after prices began tumbling. Abu Dhabi, Dubai’s oil-rich neighbour, is helping to support it through the crisis, so far to the tune of about $10 billion. Another $10 billion is likely to follow soon, and more may follow.

Property is not the only dark spot in the UAE. In the nearby emirate of Sharjah the credit crunch turned off the lights this week. Planned power stations have not been built, and as a result businesses and houses were left without electricity at a time when daytime temperatures were pushing 50C.

The result is a chastened Government, stung by recent criticism in the international press that Dubai itself is one big folly.

In a rare appearance in front of the media this week, Sheikh Mohammed Bin Rashid Al Maktoum, Dubai’s ruler and the UAE’s Prime Minister, vowed to steer the emirate through its troubles and pledged to further rein in extravagant developments. Officially, however, not a single project has been cancelled — just delayed.

“I don’t blame anybody. Some papers try to write this but they are forgetting their problems [in their own countries]. . . But people only throw stones when a tree has fruit,” he said.

Since the good Sheikh has spoken,that "the tree has borne fruit",who is now going to "pluck" it,the Chinese?!

PS:..and seeing the end is nigh,French tel.ecom employees laid off have decided to end it all...

French phone giant tries to halt wave of suicides.
Tuesday, 15 September 2009
France's national phone company has held a mass emergency meeting to discuss a wave of staff suicides blamed on redundancies and cuts.

http://www.independent.co.uk/news/world ... 87498.html

[Nandu]

Bank exec squats in $12M foreclosure home. At this point you can only

http://www.cnn.com/video/#/video/busine ... uatter.cnn

Fired: http://www.cbsnews.com/blogs/2009/09/15 ... 2023.shtml

[Hari Seldon]

Folks, whilst we D&Gers here may party with doom and gloom mantras, the point is can this thread suggest anything worthwhile for ordinary jingoes out there to do to shield themselves from the worst of the storm?

All I can think of is keep liquid ('cash is king') and steer clear of all avoidable debt.

[SwamyG]

It is age old mantra onlee. Don't spend more than what you earn - live within one's means. Have a healthy saving. Enjoy life. Have people whom you like (and who like you) around you. It will be naive to expect to face any storm individually. What if one is sitting one a pile of cash and unfortunately some near and dear did not have the opportunity to make them. Are we going to say "na na na....I am not going to give you anything na na na". If you care about somebody, then share time-tested wisdom with them.

When enough people make bad decisions, the ensuing calamity takes down people who made no or good decisions as well.

[Hari Seldon]

^True. Hope the elite understand this as much as us commons. Successful parasites don't kill the host.
But the way the elite cabal of bankers, regulators and netas has milked the system using the central bank as the main conduit, it seems they are oblivious to what may happen if the system strains to breaking point. It will be the gullitone for them, first and foremost.

And yes, as far as individual responsibility and living within means goes, like they say in the Army:

The important things are always simple.

Of course the simple things aren't necessarily easy, though.

[Akshut]

Credit crunch signals end of The World for Dubai’s multi-billion dollar property deal
James Mclean in Dubai

Link please.

[Ashwin B]

Here you go Akshut:
Credit crunch signals end of The World for Dubai’s multi-billion dollar property deal