Finance

As the U.S. Congress works to undo financial regulation, INET reflects on the lessons of the Bear Stearns bailout

From the Archives: In the wake of the Bear Stearns bailout in 2008, INET Research Director Tom Ferguson and President Rob Johnson say taxpayers rescuing banks are owed their due: “If the public is going to pay for [bailouts]… it should also get paid back for them.”

Unregulated, speculative lending markets nearly brought down the global financial system 10 years ago. Now, Western banks are exporting this failed model to the developing world.

Ten years ago when Bear Stearns crashed, the Fed decided to bail out first, ask questions later. It was a mistake that set a bad precedent.

Banks are pushing for deregulation and roll backs of Dodd-Frank’s regular check-ups on their financial health. We should be worried. 

In the face of  laissez-faire capitalism at home and resurgent nationalism across the globe, INET offers an innovative look at the causes of—and solutions for—the problems that ail a fissuring world economy.

The objective of the conference is to exchange perspectives on the risks posed by financial networks, and the role these networks play in the well-functioning of the real economy. 

Banks have long had undue influence in society. But with the rapid expansion of a financial sector that transforms all debts and assets into tradable commodities, we are faced with something far worse: financial markets with an only abstract, inflated, and destabilizing relationship with the real economy. To prevent another crisis, finance must be domesticated and turned into a useful servant of society. 

Contrary to the neoclassical model’s assumptions, shifts in aggregate demand have persistent effects on GDP

The prevailing wisdom that aggregate demand ‘shocks’ determine short-run cyclical fluctuations around a supply-determined equilibrium growth rate and an associated equilibrium unemployment rate (or NAIRU) has been called into question by various streams of literature in the last decades. Specifically, a recently revived literature on hysteresis finds significant persistence in the effects of recessions and negative aggregate demand shocks (Blanchard et al. 2015; Martin et al. 2015).

Over the next year, the Bitcoin price could double, soar tenfold, or collapse by 95% or more, and no economic analysis can help predict where in that range it will lie. Like other cryptocurrencies, Bitcoin serves no useful economic purpose, though in macroeconomic terms, such currencies probably also do little harm.

The U.S. presidential election of 2016 featured frontal challenges to the political establishments of both parties and perhaps the most shocking election upset in American history.

Note: As of March 2019, the Imperfect Knowledge Economics(IKE) Program has been re-launched as the INET Program on Knightian Uncertainty Economics (KUE). Please see the KUE page for updates on this body of work.

Contrary to conventional wisdom, government stimulus can improve the health of the economy for years after, without inflationary side effects 

Forget the myth of a savings glut causing near-zero interest rates. We have a shortage of aggregate demand, and only public spending and raising wages will change that.