Economics remedies for the global financial crisis concentrated on fixing the supply of credit. The real problem was credit demand. Maximilian Walsh
The Economic and Monetary Union of the European Union and China's central bank tweaked their monetary policies this week to inject a touch more stimulus into their
At the same time, two international heavyweights of macroeconomic policy, Lawrence Summers and Adair Turner, independently published their views as to why central banks are now administering misconceived treatment.
Summers was the chairman of President Barack Obama's Council of Economic Advisers, while Turner was the former chairman of the UK Financial Policy Committee. Both launched their criticism of central banking orthodoxy on the basis of a recent publication analysing the root causes of the global financial crisis entitled House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again.
The authors are Atif Mian and Amir Sufi, professors of economics at Princeton and the University of Chicago. While having considerable reservations about the policy recommendations of the authors, Summers strongly supports their analysis of the causes of the GFC and why the subsequent actions to address the systemic threat focused on the wrong issues. According to Summers, the work could "be the most important book to come out of the 2008 financial crisis and the subsequent Great Recession".
House of Debt, Summers writes, is important because it persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediaries, is inadequate.
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