Do We Need More of Keynes Now?

silverharp

I have always been impressed with the idea that productive consumption should be differenciated from non productive consumption and that savings are the backbone of futrue investment not printing or issuing excess credit.

A nice article from a well respected Economist Frank Shostak



http://mises.org/story/3169

Daily Article by Frank Shostak | Posted on 10/31/2008

Now that governments and central banks are subjecting their economies to aggressive monetary and fiscal-stimulus policies, many people say that the ideas of Keynes are back in fashion. We heard that Keynesian remedies can save world economies from plunging into a severe economic slump. In the United States, for instance, Republicans and Democrats are competing against each other to subject the American economy to various stimulus packages. On this the Financial Times recently wrote,

The lapses into Keynesianism take different forms. For Republicans, it is a time to propose new tax cuts for small businesses, including a waiver of the capital gains tax, which many believe would help stimulate economic activity. For Democrats, the preferences are for an extension of unemployment insurance, food stamps and assistance to struggling homeowners.

Despite trillions of dollars that central banks worldwide have pumped, some prominent commentators still maintain that it is not enough. For example, Martin Wolf writes,

Yet, in current conditions, monetary policy will be insufficient. This is a Keynesian situation that requires Keynesian remedies. Budget deficits will end up at levels previously considered unimaginable. So be it.

It is extraordinary to suggest that Keynes's ideas are now coming back to save the world. Keynesian ideas have never left the rooms of government and central-bank decision makers. The essence of the thinking of the most influential economists was and still is Keynesian. So various stimulus packages that are now introduced are a continuation of the same Keynesian policies we have been subjected to for many decades. The present economic crisis is the outcome of the large dose of Keynesianism we have been given over many decades.

In a nutshell, John Maynard Keynes held that one cannot have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence there is the need for governments and central banks to manage the economy.

Successful management in the Keynesian framework is done by influencing the overall spending in an economy. It is spending that generates income. Spending by one individual becomes income for another individual, according to Keynes. The more that is spent, the better it is going to be. What drives the economy then is spending.

Consumption and Production
In the Keynesian framework, the largest chunk of spending is on account of consumer outlays. Therefore consumer outlays are regarded as the motor of the economy — consumption sets in motion real economic growth.

But is consumption the motor of the economy? We suggest that one must make a distinction between productive and nonproductive consumption. While productive consumption is an agent of economic growth, nonproductive consumption leads to economic impoverishment.

Productive Consumption
A baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now sustaining or funding the baker while he is engaged in the baking of bread. Likewise the bread sustains the potato farmer while he is engaged in the production of potatoes. The respective production of the baker and of the potato farmer enables them to secure goods for consumption.

What makes the consumption productive in this example is the fact that both the baker and the potato farmer consume in order to be able to produce. The consumption of both the baker and the potato farmer maintains their lives and well-being. This is the only reason for production.

The introduction of money doesn't change what was said so far. For instance the baker can exchange his ten loaves of bread for $10 — he then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of exchange, money has contributed absolutely nothing to the production of bread and potatoes.

Nonproductive Consumption
So far we have seen that to secure potatoes, the baker had to exchange bread for money and then employed money to secure potatoes. Something was exchanged for money, which in turn was exchanged for something else — or something for something is exchanged with the help of money.

Trouble erupts when money is created "out of thin air." Such money gives rise to consumption, which is not backed by any production. It leads to an exchange of nothing for something.

For instance, a counterfeiter has printed a perfect $20 note. Since he secured this money by means other than the production of some useful goods or services, the counterfeiter has therefore obtained the $20 by exchanging nothing for it.

The counterfeiter uses the $20 to buy ten loaves of bread. What we have here is the diversion of real funding — ten loaves of bread — from a potato farmer towards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread — he pays two dollars per loaf. Previously the price stood at one dollar per loaf. Also note that since the counterfeiter doesn't produce anything useful he is engaged in nonproductive consumption.

The potato farmer is now denied the bread that he must have to sustain himself while he is producing potatoes. Obviously this will impair the production of potatoes. As a result, fewer potatoes will become available, which in turn will undermine the consumption of the baker, thereby impairing his ability to produce.

We can see that, while productive consumption sustains wealth generators and promotes the expansion of real wealth, nonproductive consumption only leads to economic impoverishment.

Printing money by the central bank produces exactly the same damaging effect as the counterfeit money does. Likewise the creation of money through fractional-reserve banking produces the same damaging effect. The expansion of money sets the platform for nonproductive consumption — an agent of economic destruction.

In the Keynesian framework, during a recession when consumers tend to lower their outlays, it is the duty of the government to step in and boost its expenditure. For instance, the government could employ various unemployed individuals to dig holes in the ground.

The money that the government pays these workers will boost their consumption, and this in turn will lift the overall income in the economy. According to this framework, it doesn't really matter whether holes in the ground contribute to individuals' well-being; what matters is that people are getting paid and then using the money to boost consumption.

Government doesn't earn money as such. It is not a wealth generator. So how then does it pay various individuals who are employed in non-wealth-generating projects? It secures the money through taxation, by asking the central bank to print money, or by borrowing. If we ignore overseas borrowings, it basically amounts to the diversion of wealth from wealth generators to government activities. This is the same outcome achieved by printing money: it sets in motion nonproductive consumption.

According to Mises,

there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

From this we can conclude that since government is not a wealth generator it therefore cannot grow the economy. Contrary to popular belief, the more government spends, the worse it is for the health of the economy and thus for economic growth.

Rescue packages aimed at saving the economies of the world are just laying the foundation for more misery in the months ahead. Many commentators and economic experts who advocate strong government stimulus measures never bother to ask how those measures are going to be funded — and by funding we mean real stuff: where are all the bread and the potatoes going to come from?

It doesn't occur to the Keynesian sympathizers that it is the fiscal and monetary policies of the past several decades that have given rise to nonproductive consumption. The outcome of all this is the vast amount of bubble activities. How can more of the same Keynesian policies — policies that have inflicted massive damage on wealth producers — revive the economy?

What is now required is not more Keynesian policies but rather allowing wealth producers to move fast and start generating real wealth. What is required is plenty of productive consumption. More government spending and the massive pushing of money by central banks only strengthens nonproductive consumption, thereby delaying prospects for a meaningful economic recovery.


Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global.

Économiste Monétaire

I find that both analogies the author uses are quite poor, and impotent. In this piece:

Mises wrote:

Productive Consumption
A baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now sustaining or funding the baker while he is engaged in the baking of bread. Likewise the bread sustains the potato farmer while he is engaged in the production of potatoes. The respective production of the baker and of the potato farmer enables them to secure goods for consumption.

What makes the consumption productive in this example is the fact that both the baker and the potato farmer consume in order to be able to produce. The consumption of both the baker and the potato farmer maintains their lives and well-being. This is the only reason for production.

The introduction of money doesn't change what was said so far. For instance the baker can exchange his ten loaves of bread for $10 — he then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of exchange, money has contributed absolutely nothing to the production of bread and potatoes.

Is the author trying to create a general argument against money as a medium of exchange by using a two person economy as an example? Note that if the Potato farmer and the Baker continue to produce and exchange in a 1:1 then there isn't actually any growth, it just continues in that fashion, from my interpretation of the piece, to infinitum. Maybe you can expand on that point.

I do agree on the point that Keynesian thought had never left government policy, I also agree with a previous analysis of Mises that laissez-faire economics never really existed to a large extent in the U.S.

Edit: I do find myself leaning in favour of Gordon Brown's plan to take this opportunity to increase investment in infrastructure. Obviously, that doesn't included vanity projects, and a move towards real accountability for public spending in infrastructure would be welcome.

BenjAii

I can't say I agree with Mr Shostalk's arguments.

In the first place his attack on fractional reserve banking is fairly extraordinary; so really barter would be better ? Had FRB not been invented
and its cumulative effect not existed, the modern western world we know wouldn't exist. It has been the driving force of trade and commerce, economic growth (and thus technology) since the 1700's.

And the equation all government recession killing spending=digging holes in the ground, doesn't really hold up to any scrutiny either. The government is borrowing money to invest. Investment=economic growth.

I can see why some people object to government being the body to do this, but it isn't true to say it is simultaneously taking it from wealth generators and thus exactly a net negative effect canceling out its spending.

"savings are the backbone of futrue investment" - they are also the backbone of fractional reserve banking too ! People would have no motivation for allowing banks to loan based on their savings if they weren't going to earn interest.

silverharp

UCD_Econ wrote: »

I find that both analogies the author uses are quite poor, and impotent. In this piece:

Is the author trying to create a general argument against money as a medium of exchange by using a two person economy as an example? Note that if the Potato farmer and the Baker continue to produce and exchange in a 1:1 then there isn't actually any growth, it just continues in that fashion, from my interpretation of the piece, to infinitum. Maybe you can expand on that point.

I think the point is that money is a medium of exchange nothing more nothing less, backed by the production of the 2 individuals, within the logic of the example the growth would come from increased production through productivity. The outcome is that prices would fall over time which would be the natural order of things. And in general wasnt that the story of the 19thC? , generally stable or falling prices and huge growth through procductivity and innovation?

BenjAii wrote:

In the first place his attack on fractional reserve banking is fairly extraordinary; so really barter would be better ? Had FRB not been invented
and its cumulative effect not existed, the modern western world we know wouldn't exist. It has been the driving force of trade and commerce, economic growth (and thus technology) since the 1700's.

And the equation all government recession killing spending=digging holes in the ground, doesn't really hold up to any scrutiny either. The government is borrowing money to invest. Investment=economic growth.

I can see why some people object to government being the body to do this, but it isn't true to say it is simultaneously taking it from wealth generators and thus exactly a net negative effect canceling out its spending.

"savings are the backbone of futrue investment" - they are also the backbone of fractional reserve banking too ! People would have no motivation for allowing banks to loan based on their savings if they weren't going to earn interest.

The ideal monetary system that someone like Shostak would argue for is some form of gold standard, this doesnt eliminate lending or saving, Britain had a gold standard in the 19th Century and there was no shortage of capital for investment in railroads etc.

I think it is difficult for any gov to borrow and invest sucessfully, its far too easy to pick examples where they screw with the markets under the guise of investing eg ethanol production in the US, which was far worse in economic terms then "digging holes" even the Miti model in Japan eventually came unstuck also there are good arguments in the 1930's that the US depression was dragged out due to all new deal policies

nesf

silverharp wrote: »

I think it is difficult for any gov to borrow and invest sucessfully, its far too easy to pick examples where they screw with the markets under the guise of investing eg ethanol production in the US, which was far worse in economic terms then "digging holes" even the Miti model in Japan eventually came unstuck also there are good arguments in the 1930's that the US depression was dragged out due to all new deal policies

However it's equally simple to pick examples of sensible government investment such as borrowing to build or improve basic infrastructure which will have knock-on positive effects for the private sector, thus raising tax revenues, thus making a profit. There is also the run surpluses, run deficits approach to smoothing spending over the business cycle which, if deficit spending is kept sensible, can be a good idea from a expectations/ability to invest view.

What you're getting at is how easy it is for a Government to misgovern, be slaves to special interests and/or corruption. Which is a separate issue to whether a Government should run a deficit.

nesf

UCD_Econ wrote: »

I find that both analogies the author uses are quite poor, and impotent. In this piece:

Is the author trying to create a general argument against money as a medium of exchange by using a two person economy as an example? Note that if the Potato farmer and the Baker continue to produce and exchange in a 1:1 then there isn't actually any growth, it just continues in that fashion, from my interpretation of the piece, to infinitum. Maybe you can expand on that point.

Eh the point you underlined is merely a restatement of money is a medium of exchange and only that. The value of money as a medium of exchange is as the oil for the wheels of commerce, it is not a good in and of itself. It facilitates trade but is not traded itself (ignoring the existence of different currencies for the moment) Money can act as this whether it's a gold standard or fiat system. He isn't arguing that barter is superior to a monetary system, he is merely using the analogy to highlight that money is merely the medium of exchange rather than a good produced and that it should be explicitly viewed that way.

The point of contention is whether unproductive consumption, as he defines it, is innately destructive or not. There is some support for this in that the huge financial sector in the US, while a large driver of GDP growth, does not actually produce anything*. The issue being that this system has the power to bring the rest of the economy to its knees. If it existed as an isolated bubble (perhaps like the gambling industry) it would be a less contentious topic.


*Strictly speaking here, the point is that it has grown beyond the point optimal for enabling commerce and it's this excess growth that could be construed as potentially destructive.

silverharp

nesf wrote: »

There is also the run surpluses, run deficits approach to smoothing spending over the business cycle which, if deficit spending is kept sensible, can be a good idea from a expectations/ability to invest view.

I'd agree but there are not many examples where a gov. pays its debt down. I'm sure even Keynes would have liked to see that the gov pays its debts back during the up phase in an economic cycle.
I just dont like the idea of non liquidating debt or debt not linked to production, a build up of this type of debt be it in the public sector or private sector inhibits future growth, as income is sucked out of the system in the form of interest which by definition cannot be created out of thin air in the way that credit is.

if you look back to the 1950's in the US the amount of money money/credit needed to generate an additional unit of real GDP as been rising at an increasing rate, this means that increasing amounts of non liquidating debt is coming into the system which is a drag on production and a destabilising factor for the system as a whole.

Économiste Monétaire

silverharp wrote: »

I think the point is that money is a medium of exchange nothing more nothing less, backed by the production of the 2 individuals, within the logic of the example the growth would come from increased production through productivity. The outcome is that prices would fall over time which would be the natural order of things. And in general wasnt that the story of the 19thC? , generally stable or falling prices and huge growth through procductivity and innovation?

I never see him mention that the currency is backed by anything. In the U.S., for example, all physical currency is backed by collateral of government securities and gold certificates. Now, being backed by collateral and having the ability to trade money at the central bank for, say, aren’t the same--which I understand. However, a regional reserve bank cannot create money without having the collateral to back it. The high powered money created, in the author’s analogy, isn’t done so in the same fashion, seeing as there are no other goods in the economy except for the 10 loaves and 10 potatoes, so the CB could not create the money as there is nothing else to back it.

I completely agree that the gold standard, as operated by the British after the bimetallic age pre-Napoleon, was the prime example of effective implementation of the gold standard. There was remarkable growth and general price stability, in the long run.

The problem, I feel, with the analogy is (a) what I already stated above which was written in a misleading fashion, and (b) the central bank increases the broader money supply almost recklessly, without thought. The role of a central bank, specifically in regards to the money supply, is to increase the money supply to match the value of goods and services in the economy, if monetary growth were to fall below real growth in output it would produce deflation; and vice versa. However, the money supply isn’t constant, especially in today’s world rather than in the 18th century, due to easy-to-liquidate assets.

I’m still unsure of exactly what the Austrian School’s position is on monetary policy. There is no logical reason why there shouldn’t be a reasonable level of inflation of course, i.e. 2% a year, seeing as no measure of price level increases accurately reflects quality increases and the known over/under-statement of the inflation rate, with fiat money. Inflation has been quite low by historical standards in the last 15 years, so the argument for a gold standard as the protection against high inflation in the long-run hasn't really held, and a gold standard necessitates a fixed currency with it. It effectively eliminates discretionary monetary policy in the face of short-run shocks; output is more variable than in a fiat system.

Is the Austrian school advocating an almost commodity money style gold standard to that of the British 19th Century to early 20th Century, or a return to Bretton Woods? Any gold standard system leaves economies quite vulnerable to short-run monetary shocks, the coefficient of variation for prices during the gold standard was considerably higher than in our fiat currency age. Added to that, what is the actual resource cost of maintaining a gold standard? Is there even enough gold mined to tie the entire money supply to gold? The U.S. stayed in the Great Depression until it dropped the Gold Standard. No monetary system is perfect, which is probably something we all agree on, but I place my faith in an inflation/interest rate targeting system that's become paradigm since the move away from specific monetary targeting.

Nesf, I read the piece a bit wrong, my bad. Is the author trying to distinguish tangible assets and the propagation of intangible financial assets? The economy of potatoes and bread loaves isn't actually growing, it's simply reproducing itself.

Just to mention as an aside, “the natural order of things”, because I got the sense of Physiocracy from the original story, the specifics of Agriculture being promulgated as the productive sector, and I think you added that as a well placed quip

silverharp

UCD_Econ wrote: »

I’m still unsure of exactly what the Austrian School’s position is on monetary policy. There is no logical reason why there shouldn’t be a reasonable level of inflation of course, i.e. 2% a year, seeing as no measure of price level increases accurately reflects quality increases and the known over/under-statement of the inflation rate, with fiat money. Inflation has been quite low by historical standards in the last 15 years, so the argument for a gold standard as the protection against high inflation in the long-run hasn't really held, and a gold standard necessitates a fixed currency with it. It effectively eliminates discretionary monetary policy in the face of short-run shocks; output is more variable than in a fiat system.

Inflation/ inflation targeting is dangerous imo , as a central bank doesnt know where the excess credit will go , look at house prices , oil and commodities this decade, this was due to excess credit creation but was not picked up in any inflation index. And it creates artificial wealth transfer mecahanisms from creditors to debtors. These are massive distortions which send incorrect price signals to the market and distortions create blowback which we are starting to see now. for instance many famalies in Ireland are going to have their lives turned upside down when the full effects of the credit crises hits, all because of a system that mispriced assets/risks and interst rates and I feel sorry for them

UCD_Econ wrote: »

Is the Austrian school advocating an almost commodity money style gold standard to that of the British 19th Century to early 20th Century, or a return to Bretton Woods? Any gold standard system leaves economies quite vulnerable to short-run monetary shocks, the coefficient of variation for prices during the gold standard was considerably higher than in our fiat currency age. Added to that, what is the actual resource cost of maintaining a gold standard? Is there even enough gold mined to tie the entire money supply to gold? The U.S. stayed in the Great Depression until it dropped the Gold Standard. No monetary system is perfect, which is probably something we all agree on, but I place my faith in an inflation/interest rate targeting system that's become paradigm since the move away from specific monetary targeting.

floating exchange rates have been a disaster and extremely destabalising, under a more stable system be it a gold standard or Bretton woods, there would be little FX/Bond speculation nor a need for CDO's etc and all the "financial weapons of mass destruction" that the current system encourages.
The goal of the Austrain approach is to focus more on individual liberty and to curtail the power of gov. and I guess the warning from the Austrians is that an unsound money system eventually reaches an end game where it entres a massive deflation or hyperinflation that the central authorities cant contain.

BenjAii

Silverharp, it's the position of the Austrian school that a free market economy with as little interference or participation by government, is as a given, a good thing. This is broadly the position of many others who champion the free market too.

This seems to be an axiom of so many; yet i'm curious is there actually any current data that supports these widely held assumptions. ?

Whilst I don't advocate "big government"; i'm very doubtful of those champion the "free market only" approach & they never seem to argue their position from data (at least not current data), referring instead to the more statist 1970's or the USSR.

But among a number of objections that spring to mind to their position, 2 obvious ones are that

a) idealised free markets don't in reality exist and never will; in many sectors of their economic activities consumers are dealing with cartels or dominant players who dicate terms in their economic field.

b) we need to have some gvernment, our modern societies could not function without that, I'm not always convinced they are the wrong body to be effectively running sections of the economy. US healthcare vs. nationalised European healthcare a case in point. The US costs twice as much as GDP, and by most measures is worse. Yet the US model as the free market one, according to its supporters should be the superior; instead it is worse & far less efficient.

This is of course a political minefield, as right & left broadly define themselves on the opposte sides of an arguement here, but I would be curious to see data that is as unbiased as possible, referring to modern western economies, that acually backs up the Austrian schools position, that government as an economic player is always a bad.

nesf

BenjAii wrote: »

Silverharp, it's the position of the Austrian school that a free market economy with as little interference or participation by government, is as a given, a good thing.

That's strictly not the case. It's not the position that the market is a good thing it is that the market is too complex for accurate modelling and prediction and that government intervention cannot thus be fully informed of either the present state of the economy or the effects of any policy enacted by them that seems to be the basic tenet. If you accept that Government intervention can only ever be partially informed then it's a short step to advocating minimal involvement when market failure is not an issue. Where market failure is an issue then Government involvement has to occur since even though this involvement will be imperfect it is better than the alternative. There is also the point of view (by Mises I think?) that a completely free market is impossible anyway so we're always looking at a trade-off between leaving something to the market or the Government with neither being completely negative, just better than the other.

silverharp

BenjAii wrote: »

a) idealised free markets don't in reality exist and never will; in many sectors of their economic activities consumers are dealing with cartels or dominant players who dicate terms in their economic field.

b) we need to have some gvernment, our modern societies could not function without that, I'm not always convinced they are the wrong body to be effectively running sections of the economy. US healthcare vs. nationalised European healthcare a case in point. The US costs twice as much as GDP, and by most measures is worse. Yet the US model as the free market one, according to its supporters should be the superior; instead it is worse & far less efficient.

http://mises.org/story/1588

the above is an interesting article on the US health system, with the basic idea that it is full of economic distortions so to set it up as a model of a free market system is a strawman argument, oterwise the mises site is a good Austrian resource


but agree it is unrealistic to expect a free market equilibrium however at any point in time a society is drifting in one direction or another and all I can see is a philisophical backdrop which is leading away from free markets, to more unstable socialised markets. The next few years will prove to be interesting, I hope you have a front row seat and a big box of popcorn ;-)

BenjAii

nesf wrote: »

That's strictly not the case. It's not the position that the market is a good thing it is that the market is too complex for accurate modelling and prediction and that government intervention cannot thus be fully informed of either the present state of the economy or the effects of any policy enacted by them that seems to be the basic tenet. If you accept that Government intervention can only ever be partially informed then it's a short step to advocating minimal involvement when market failure is not an issue.

I don't really get your logic here.

Granted on the widest scale economies are too large and complex to map with 100% accuracy, but why should that stop governments acting as economic participants ?

It is equally true, that no other entities, be they corporate or individual, can have accurate knowledge either, but we wouldn't have an economy if only people with perfect knowledge of it participated.

Surely the question is the governments competence as a participant ?

My question was that free market theories always assume (especially when taken to the extreme), as an axiom, that governments are less competent as any given free market alternative; yet looking around us in western economies would actually often seem to suggest otherwise.

nesf

BenjAii wrote: »

I don't really get your logic here.

Granted on the widest scale economies are too large and complex to map with 100% accuracy, but why should that stop governments acting as economic participants ?

It is equally true, that no other entities, be they corporate or individual, can have accurate knowledge either, but we wouldn't have an economy if only people with perfect knowledge of it participated.

Surely the question is the governments competence as a participant ?

Government intervention is what I am speaking of rather than Governments as simple market participants, i.e. where a Government monopoly is set up to provide some good or service versus leaving it to the market or where policy initiatives are enacted in order to bring about macroeconomic change to the economy. Such as where a Government pursues a policy in order to bring about change X to the economy where it can not be absolutely sure of either the effect of the policy or what the state of the economy is right now.

Also, where the Government acts as a participant where it is not subjected to the same rules as other market participants it can distort the market or disincentivise private participation. This can be necessary where market failure is a severe problem or where the market simply wouldn't supply the needed goods or services, such as with public goods but it is not always desirable.

BenjAii wrote: »

My question was that free market theories always assume (especially when taken to the extreme), as an axiom, that governments are less competent as any given free market alternative; yet looking around us in western economies would actually often seem to suggest otherwise.

We're not looking at a free market though, we're looking at the result of a badly regulated market. If fractional lending is to be allowed then the market has to be regulated by definition, you simply cannot deregulate it and expect it to work because the potential for market failure and system wide shocks is enormous coupled with how it is integrated into the rest of the economy.

A certain amount of Government intervention is necessary and the deregulation that was going on in the US was not inspired by a desire to leave a more efficient market take over from where the Government was being inefficient but where companies could make a bigger profit at very high levels of risk which is a very different story.

silverharp

nesf wrote: »

We're not looking at a free market though, we're looking at the result of a badly regulated market. If fractional lending is to be allowed then the market has to be regulated by definition, you simply cannot deregulate it and expect it to work because the potential for market failure and system wide shocks is enormous coupled with how it is integrated into the rest of the economy.

A certain amount of Government intervention is necessary and the deregulation that was going on in the US was not inspired by a desire to leave a more efficient market take over from where the Government was being inefficient but where companies could make a bigger profit at very high levels of risk which is a very different story.

Also dont underestimate the effect of the community reinvestment acts which basically put a gun to the banks head and told to weaken their lending standards, and dont get me started on the GSC's