What We've Learned from the Financial Crisis

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. 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. The author has followed academic economics and finance as a journalist since the mid-1990s. To him, three shifts in thinking stand out: CO Macroeconomists are realizing that it was a mistake to pay so little attention to finance. (2) Financial economists are beginning to wrestle with some of the broader consequences of what they've learned over the years about market misbehavior. (3) Economists' extremely influential grip on a key component of the economic world-the corporation-may be loosening. In the early 1930s, he concludes, policy errors by governments and central banks turned a financial crisis into a global economic disaster. In 2008 the financial shock was at least as big, but the reaction was smarter and the economic fallout less severe.