how markets fail - john cassidy

[...]... Credit-driven boom-and-bust cycles have plagued capitalist economies for centuries During the past forty years, there have been 124 systemic banking crises around the world During the 1980s, many Latin American countries experienced one In the late 1980s and 1990s, it was the turn of a number of developed countries, including Japan, Norway, Sweden, and the United States The collapse of the savings-and-loan... economists simply didn’t have the tools needed to figure out what happens in these instances But we now know a lot more about how purposeful but self-defeating behavior, or what I refer to as rational irrationality, can develop and persist In Part III, The Great Crunch, I show how rational irrationality was central to the housing bubble, the growth of the subprime mortgage market, and the subsequent... reason, the economics of market failure has received a lot less attention than the economics of market success Perhaps the word “failure” has such negative connotations that it offends the American psyche For whatever reason, “market failure economics” never took off as a catchphrase Some textbooks refer to the “economics of information,” or the “economics of incomplete markets. ” Recently, the term “behavioral... parts of the country real estate values were losing touch with incomes In the fall of that year, I visited the prototypical middle-class town of Levittown, on Long Island, where, in the aftermath of World War II, the developer Levitt and Sons offered for sale eight-hundred-square-foot ranch houses, complete with refrigerator, range, washing machine, oil burners, and Venetian blinds, for $7,990 When I arrived,... Nassau Senior, and John Stuart Mill, developed the scientific side of his analysis, spelling out the logic of free trade, and explaining how, through the interplay of market forces, the revenues that businesses generated were split among rents, profits, and wages Like Smith, these men believed free markets had internal laws that governments sought to interfere with at their peril John Stuart Mill, a... who died in 1992, is a much less well-known figure When I began studying economics at Oxford during the early eighties, Hayek was widely seen as a right-wing nut True, he had received the Nobel Memorial Prize in 1974, but that was viewed within the economics profession as a political sop, with Hayek’s name added to balance that of his co-winner, Gunnar Myrdal, a left-wing Swedish economist (Myrdal later... carrying much of the economy with it.” How could such a thing happen? Bad economic policy decisions played an important role In keeping interest rates too low for too long, Greenspan and Bernanke distorted the price signals that the market sends and created the conditions for an unprecedented housing bubble Greed is another oft-mentioned factor; stupidity, a third (How could those boneheads on Wall Street... title Market failure isn’t an intellectual curiosity In many areas of the economy, such as health care, high technology, and finance, it is endemic The previous sentence might come as news to the editorial writers of The Wall Street Journal, but it isn’t saying anything controversial For the past thirty or forty years, many of the brightest minds in economics have been busy examining how markets function... “behavioral economics” has come into vogue For myself, I prefer the phrase “reality-based economics,” which is the title of Part II Reality-based economics is less unified than utopian economics: because the modern economy is labyrinthine and complicated, it encompasses many different theories, each applying to a particular market failure These theories aren’t as general as the invisible hand, but they are... over hundreds of failed thrifts Later in the 1990s, many fast-growing Asian countries, including Thailand, Indonesia, and South Korea, endured serious financial blowups In 2007–2008, it was our turn again, and this time the crisis involved the big banks at the center of the financial system For years, Greenspan and other economists argued that the development of complicated, little-understood financial .