![]() ![]() That intervention seems to have prevented a second Great Depression-although the inhabitants of a few unfortunate countries such as Greece and Spain might beg to differ. Trust evaporated, and not until governments jumped in, late in 2008, to guarantee that major banks would not fail did the financial markets settle down and begin fitfully to function again. Banks began to doubt one another’s solvency. Buyers and sellers simply couldn’t agree on price, and this impasse soon spread to other debt markets. In the summer of 2007, though, the markets for some mortgage securities stopped functioning. The right price will always find a buyer and a seller, and millions of buyers and sellers are far better than a few government officials at determining the right price. The basic idea that had governed economic thinking for decades was that markets work. So did prevailing notions about how the economic and financial worlds are supposed to function. In 2008 the financial shock was at least as big, but the reaction was smarter and the economic fallout less severe.įive years ago the global financial system seemed on the verge of collapse. In the early 1930s, he concludes, policy errors by governments and central banks turned a financial crisis into a global economic disaster. (3) Economists’ extremely influential grip on a key component of the economic world-the corporation-may be loosening. (2) Financial economists are beginning to wrestle with some of the broader consequences of what they’ve learned over the years about market misbehavior. ![]() To him, three shifts in thinking stand out: (1) Macroeconomists are realizing that it was a mistake to pay so little attention to finance. The author has followed academic economics and finance as a journalist since the mid-1990s. But then came the Great Recession, when the global financial system seemed on the verge of collapse-as did prevailing notions about how the economic and financial world is supposed to function. For decades, the basic idea that governed economic thinking was that markets work: The right price will always find a buyer and a seller, and millions of buyers and sellers are far better than a few government officials at determining the right price. ![]()
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