We’re still in the woods: A non-Minsky story on the financial crisis

Here’s a model of the financial crisis based on the ideas of Fischer Black, written by Tyler Cowen.

Cowen’s thesis is that the crisis cannot be fixed by fiscal policy, and implicitly, also not by monetary policy.  At best these conventional macro instruments can perform some kind of triage to limit the damage from “excessive risk-taking” that brought about the preconditions for the crisis.  Before the global economy can recover, the “zombie” banks have to regain financial health (still not on the horizon at this time), and the  “structural” excesses in the various economies have to be worked off (Cowen calls these the necessary “sectoral shifts”).

In short, it is perhaps premature to declare that the global recession will soon be over.

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