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Getting it Wrong
Blame for the recent financial crisis and subsequent recession has commonly been assigned to everyone from Wall Street firms to individual homeowners. It has been widely argued that the crisis and recession were caused by “greed” and the failure of mainstream economics. In Getting It Wrong, leading economist William Barnett argues instead that there was too little use of the relevant economics, especially from the literature on economic measurement. Barnett contends that as financial instruments became more complex, the simple-sum monetary aggregation formulas used by central banks, including the U.S. Federal Reserve, became obsolete. Instead, a major increase in public availability of best-practice data was needed. Households, firms, and governments, lacking the requisite information, incorrectly assessed systemic risk and significantly increased their leverage and risk-taking activities. Better financial data, Barnett argues, could have signaled the misperceptions and prevented the erroneous systemic-risk assessments.
When extensive, best-practice information is not available from the central bank, increased regulation can constrain the adverse consequences of ill-informed decisions. Instead, there was deregulation. The result, Barnett argues, was a worst-case toxic mix: increasing complexity of financial instruments, inadequate and poor-quality data, and declining regulation.
Following his accessible narrative of the deep causes of the crisis and the long history of private and public errors, Barnett provides technical appendixes, containing the mathematical analysis supporting his arguments.
About the Author
William A. Barnett is Oswald Distinguished Professor of Macroeconomics at the University of Kansas, Director at the Center for Financial Stability in New York City, and Senior Fellow at the IC2 Institute at the University of Texas at Austin. He is Editor of the eminent journal Macroeconomic Dynamics and is coauthor with Nobel Laureate Paul A. Samuelson of the book Inside the Economist’s Mind, translated into seven languages. He was on the staff of the Federal Reserve Board from 1974 to 1982.
—James J. Heckman, University of Chicago and University College Dublin, Nobel Laureate in Economics
—Kenneth L. Judd, Hoover Institution, Stanford University
—Julio J. Rotemberg, William Ziegler Professor of Business Administration, Harvard Business School
—Steve H. Hanke, Professor, Johns Hopkins University, and Forbes magazine columnist
—Robert E. Litan, Kauffman Foundation Vice President for Research and Policy and Brookings Institution Senior Fellow
—Jeffrey M. Wrase, Professional Congressional Staff Member
—George S. Tavlas, Director General, Bank of Greece; Alternate Member, ECB Governing Council; and Editor, Open Economies Review
—Peter Ireland, Murray and Monti Professor of Economics, Boston College
—Esfandiar Maasoumi, Arts and Sciences Distinguished Professor, Emory University, and Editor of Econometric Reviews
—Lawrence Goodman, President, Center for Financial Stability, Inc.
Winner, 2012 American Publishers Award for Professional and Scholarly Excellence (PROSE Award) in Economics, presented by the Professional and Scholarly Publishing Division of the Association of American Publishers