Why Don’t Economics Textbooks Focus on Financial Crises?
That’s the good question posed by the always-thoughtful David Warsh, proprietor of Economic Principals. Here is his lead:
How peculiar is it that the leading introductory economics texts scarcely mention the cycles of manias, panics, and crashes that have been a familiar feature of global capitalism since its emergence in the 17th century?
No propensity to bubble or bail is among the ten big ideas that govern economics in N. Gregory Mankiw’s text, for example. Ben Bernanke, in the book he wrote with Robert Frank before he became chairman of the Fed, discusses the 1990’s banking crisis in Japan, the dot-com episode in the U.S., and the Argentine collapse in 2001, along with the Great Depression, on which he is an expert; he even mentions in passing the “reckless lending” that led to the U.S. savings and loan crisis in the 1980’s: but the tendency to repeated financial crises is not remarked, and neither “bubble” nor “credit crunch” appear in the glossary.
There’s a lucid discussion of banking panics in Paul Krugman’s principles text with Robin Wells; he asks whether the Fed should have sought to puncture the stock bubble of the late 1990’s: but the “sovereign debt bomb” of the 1970’s and the S&L crisis of the 1980’s have disappeared in the dim mists of time. Even Karl Case and Ray Fair don’t make much of a case for the perennial nature of crises (at least in my edition), though Case, of Wellesley College, and his colleague Robert Shiller, of Yale University, have played a prescient and central role in the analysis of the real estate crash.
Some might say that normative economics doesn’t dwell on such crises because they are not normative events; which is exactly why a lot of people don’t like to pay much attention to what most economists have to say about such matters. Any boat is safe in calm seas — just as nearly any economic theory is defensible in calm time; but in crises — well, a lot of good-looking theories tend to get swamped.
Warsh ends his piece with the truest line of all:
It is the next secretary of the U.S. Treasury who will have the really interesting job.
Here’s the latest on whom Obama and McCain might pick.
Early short lists: McCain likes Warren Buffett, Meg Whitman, and John Chambers; Obama likes Tim Geithner, Larry Summers, and Roger Altman. (McCain again touted Whitman in last night’s debate; Obama played it coy.)
There was speculation a while back that Phil Gramm “would almost certainly be Treasury secretary in a McCain administration,” but Gramm probably whined himself out of that possibility.
Although InTrade has written a few contracts on future presidential maneuvers, I don’t yet see a market for Treasury secretaries. Won’t be long, I imagine.
Side note: one characteristic of this financial meltdown that I find noteworthy is the lack of bull-by-the-horns leadership. Bernanke and Paulson are plainly doing their best, but they seem to have inspired very little public confidence.
The president is typically in a position to inspire such confidence, but when Pres. Bush goes on TV these days to talk about the crisis, he seems to be largely ignored. That is what happens when a politician has squandered his political capital. But markets, just like nature, abhor a vacuum. Which is why I suspect that November 5 will be a healthy day for the markets no matter who wins.