Photo: Bloomberg
Photo: Bloomberg

What economists still don’t get about the 2008 crisis

In general, the notion that economic booms cause busts, instead of being random unrelated events seems to have much more currency beyond the ivory tower than within it



Another important insight from the Great Recession was that traditional monetary policy isn’t always enough to stabilize the economy—when interest rates hit zero, other measures are needed. These could include quantitative easing, forward guidance or fiscal stimulus. As New Keynesian pioneer Jordi Gali noted in a recent summary (, there has been much work figuring out how New Keynesian models can deal with zero interest rates. There has also been much work on making the models more realistic by taking into account the big differences among consumers and companies. These are important innovations, and they address glaring deficiencies in the pre-2008 models. But they don’t feel like a big break with the status quo. Most importantly, the basic notion of recessions as driven by rational actors’ responses to unpredictable, sudden events remains in place.

That would come as a jarring surprise to many outside academia. To lots of people, it seems obvious that the 2008 crisis was long in the making—the product of years of financial and regulatory folly. In general, the notion that economic booms cause busts, instead of being random unrelated events—an idea advanced by Hyman Minsky—seems to have much more currency beyond the ivory tower than within it. But at least a few economists are working on something more revolutionary—a new interpretation of recessions, booms and financial markets that more closely matches the popular idea that business cycles are both predictable and driven by irrationality.







Noah Smith is a Bloomberg Opinion columnist.

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