Macroeconomic Theory and its Failings
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Macroeconomic Theory and its Failings

Alternative Perspectives on the Global Financial Crisis

Edited by Steven Kates

This innovative book focuses on the current global financial crisis and the inadequacies of the economic theories being used to guide policy. In so doing, it tackles the economic theories that have been used firstly to understand its causes and thereafter to contain the damage it has brought.
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Chapter 2: Did Bernanke’s ‘Creditism’ Aggravate the Financial Crisis of 2008?

Tim Congdon


Tim Congdon Keynes once described a rival’s work as ‘an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam’.1 Since September 2008 the world economy has been closer to Bedlam than at any time since the end of the Second World War. Turmoil in stock exchanges and commodity markets has been accompanied by almost constant public wrangling between politicians, financial regulators and bankers. Even worse, output and employment have been on a drastic downward slide, causing many comparisons to be drawn with the Great Depression of the early 1930s. Is there an intellectual mistake which, by the remorseless logic of events, has ended up in the international financial Bedlam of late 2008 and early 2009? Of course the current crisis is complex and multifaceted, and has many causes. However, the argument here is that one particular line of thought has to carry a large share of the blame for what went wrong. Only now is a rather different set of ideas being heard, perhaps foreshadowing a radical move to better policies and a sharp improvement in the economic situation. Our starting point is a recondite article in the May 1988 issue of the American Economic Review, on ‘Credit, money and aggregate demand’ by Ben Bernanke and Alan Blinder. Both authors later became prominent in the Federal Reserve (the Fed), with Bernanke receiving the ultimate accolade when he was appointed chairman of the board of governors in February 2006. The article’s emphasis was on...

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