At Economist's View, Stiglitz: Towards a General Theory of Deep Downturns. Excerpts from a recent paper.
Here, excerpts from the excerpts:
This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence?
Why so deep? Why so long? And, where do they come from?
The paper argues that while real business cycles and New Keynesian theories with nominal rigidities may help explain certain historical episodes, alternative strands of New Keynesian economics focusing on financial market imperfections, credit, and real rigidities provides a more convincing interpretation of deep downturns, such as the Great Depression and the Great Recession, giving a more plausible explanation of the origins of downturns, their depth and duration.
Finance, credit, and real rigidities. In that order.
Or, not quite in that order I guess:
Since excessive credit expansions have preceded many deep downturns, particularly important is an understanding of finance, the credit creation process and banking, which in a modern economy are markedly different from the way envisioned in more traditional models.
A lot of people will like that one: Since credit expansion is a problem, it is important to understand the credit creation process and banking.
Is excessive credit use a problem, or is it not? Simple question.
The blatantly obvious problem with excessive credit use is the cost of it. Or it should be blatantly obvious, but every time I say "the cost of it" people think I mean the rate of interest. Duh. How about the interest rate times the number of dollars of debt outstanding, to get a total cost of all the credit that is presently in use. How about that?