Best of How To Understand the Great Recession

CONGRATULATIONS, Will! Your post on Financial Innovations in the Banking Industry is this week’s Best of the Blog!

The Blog Council for this week (Macey, Jessie, and Jordi) would also like to highlight other notable posts:

Derek for Most Passionate: The Great Recession: Making Fools of Economists

Emily for Best Use of Resources: The Great Recession and Reform

Molly for Most Original IdeaLehman Sisters?

We would also like to give a SHOUT OUT to Christian for redefining eloquence in An Eloquent Reflection on Innovation in The Wire

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The Great Recession and Reform

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While living in the Bucknell bubble, I tried to avoid hearing about the financial crisis.  I guess my thinking was the less I knew about it, the less real it was.  This was when I was a naïve sophomore, but now as a junior I am much wiser (maybe) and I realize that it is better to be informed and understand the financial recession than to have no idea what is happening. Continue reading

The Great Recession: Making Fools of Economists

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“The state of the economy is good… The battles of yesteryear [are] over” – 2008, Olivier Blanchard: Chief Economist at The International Monetary Fund

“The central problem of depression-prevention has been solved”  – 2003, Robert Lucas: University of Chicago

The overconfidence of economists, as displayed by the quotes above, in the state of the macroeconomy prior to the Great Recession illustrates one of the central causes for the current economic downturn. The belief that economic problems had largely been solved led economists to idea that they could predict the market’s behavior; creating the perception that their risk was largely mitigated by this ability. So strong was their belief in the success of their field that economists claimed the markets were too inherently stable for any unforeseen downturn in the economy. We know better now however, and the economists who brazenly denied the possibility of a significant recession have been forced to swallow their words as the economy fights the greatest downturn since the Great Depression. Still, the economists were not the only individuals who held the belief that their ability to predict the movement of the “inherently stable” market allowed them to remove large amounts of risk.

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“Populism” and further crisis

Simon Johnson, in a recent post titled “Populism” , addressed our current economic situation and stated that the language being used to discuss the issues we now face “reveals a complete misunderstanding of our current situation.” This assertion is based around the banks that have now been deemed “too big to fail;” and how, despite the efforts to correct the problem, these banks have increased in size due to government investment of bail out money. Resulting in a commitment to engage in a cycle, which Johnson describes as “repeated boom-bust-bailout,” that only adds to the problem. Failing to address the actual issues that led to the current financial crisis, the commitment to this cycle only sets us up to face similar problems in the future

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