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Interview with *The Economist*
I was asked six questions (mostly about Create Your Own Economy, but not all), here is one of them:
FE: What has most surprised you about the current economic downturn?
Mr Cowen: That it happened with such severity. As an economist I grew up reading and thinking about two formative events. The first was the crash of the real estate bubble in the late 1980s, preceded by the stock market crash in 1987. The second was the Third World debt crisis of the early and mid-1980s. Both were bad, but for the United States neither were like the last two years. I’ve never been a believer in any of the extreme forms of the efficient markets hypothesis, but those events made me overly complacent about how badly crashes and excess leverage can turn out. In the early 1980s I expected widespread insolvency for major U.S. banks and when they muddled through I ended up overrating their ability to do the same again.
Posted by Tyler Cowen on July 6, 2009 at 07:09 AM in Economics | Permalink
Comments
Tyler,
How long does it take you to read The Washington Post, Wall Street Journal, New York Times, and Financial Times every morning? What percentage of the articles do you read, and of those that you do read, what percentage of them do you read?
V.S.
Posted by: VeraSmith at Jul 6, 2009 8:56:11 AM
With all surprises, the heurisitics we use to project the future from the past are inadequate. However, I believe, that we can overcome this natural limitation by jumping to an extremely unlikely event and then wondering how it must have come about.
Posted by: michael webster at Jul 6, 2009 10:13:13 AM
I don't know. How bad is it? We had (too) low unemployment and now it's high. We've had major banks go under and the world didn't stop, though people didn't like it. The lender of last resort lends as a last resort and people are shocked.
Anyway, it seems like the risk is that we don't have a hangover, but cirrhosis. If this probably really did build up over decades, then it's not likely to be fixed in a couple years, and any problem the government can't tax or shoot they lose interest in quickly. And treating a long-term unwinding like a panic, regardless of one's business cycle theory preferences may not be ideal.
As for Twitter and swimming in free stuff, we may be observing the unwinding of the paradox that the limit to growth is human labor, and the solution is their residual energy.
Posted by: Andrew at Jul 6, 2009 10:17:16 AM
I don't fully understand your response. Many of the big banks are going to muddle through. With government assistance, yes, but what started as a problem on Wall Street is now a problem on Main Street. Preventing a banking collapse was not sufficient, it turns out, to prevent unemployment popping over 10% (and probably headed to 11 at least before turning around)
Posted by: mpowell at Jul 6, 2009 1:27:09 PM
Tyler, you would do well reading a little economic history of the United States...written by historians and NOT economists.
Posted by: Nik Kondratieff at Jul 6, 2009 4:20:25 PM
So basically, you didn't think that history could repeat itself, in terms of negative effects on the country at large? Is there a subtlety I missed?
Posted by: agm at Jul 7, 2009 1:06:09 AM
Tyler, what are your thoughts regarding the response to the crisis? Is the issue of additional debt, or at least to promise of such liquidity, a manageable path or are we taking a similar approach to the post-WWI credit crisis?
Posted by: jh at Jul 7, 2009 2:05:49 PM
thanks
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