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 11: Bankers Gone Wild: The Crash of 2008

Robert E. Prasch

Extract

11. Bankers gone wild: the Crash of 2008 Robert E. Prasch ‘IT’ DID HAPPEN AGAIN By now everyone understands the broad outline of what has occurred. ‘It’, that is to say a financial crisis on the order of the Great Crash of 1929, has taken place. Banks across the USA, the UK and to a lesser extent in Europe, drawing upon their vast political leverage and touting their superior innovation, economic modeling, and risk-managing skills, pressed for, installed and then took advantage of deregulated and liberalized domestic and international financial markets to drive themselves off a cliff. In general, this would be unobjectionable. The problem is that they did it with other people’s money and devastated much of the world’s economy in the process. The damage has been so severe that more than a few people, even some of the USA political and media elite, have come to wonder if the performance of Wall Street’s top five investment banks really merited the $39 billion in bonuses they awarded themselves for their ‘efforts’ in 2007. But what of the firms? By the end of 2008 Lehman Brothers was bankrupt, Bear Stearns and Merrill Lynch were forced into sudden and humiliating mergers to avoid bankruptcy, and Morgan Stanley and Goldman Sachs had transformed themselves into bank holding companies so that they could access the ready (and secretive) discount lending facilities of the Federal Reserve System. In short, none of these firms would survive the next year as independent investment banks. The numbers...

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