A weekend topic starting with J. Bradford DeLong, Professor of Economics at the University of California at Berkeley. "The 2008 financial crisis and subsequent recession left the Global North 10% poorer than it otherwise would have been, based on 2005 forecasts. For those hoping to understand this episode better, I have long recommended four books, in particular: Manias, Panics, and Crashes, by the twentieth-century economist Charles P. Kindleberger; This Time Is Different, by Carmen M. Reinhart and Kenneth S. Rogoff of Harvard University; The Shifts and the Shocks, by the Financial Times economics commentator Martin Wolf; and Hall of Mirrors, by my University of California, Berkeley, colleague Barry Eichengreen.."

"Now, I want to add a fifth book to the list: A Crisis of Beliefs: Investor Psychology and Financial Fragility, by the economists Nicola Gennaioli and Andrei Shleifer. It offers a welcome rejoinder to those who argue that the past decade was an unavoidable result of the housing bubble in the United States. Many experts still claim that the bubble’s deflation triggered the financial crisis. But the fact is that the bubble had already deflated substantially before the crisis erupted."

"Gennaioli and Shleifer’s second important contribution is to show that 'crises of beliefs' like the one that precipitated the disaster of 2008-2009 are deeply rooted in human psychology, so much so that we will never be free of them. Thus, neither prudential policies nor crisis-response measures should treat these occurrences as flukes or one-off exceptions. Crises of belief are manifestations of a chronic condition that must be managed."

"Thus, central banks and fiscal authorities should not use the end of a crisis as an excuse to step back or to take their hands off the wheel. Moreover, the seeds of the next Kindlebergian sequence – displacement, optimism, enthusiasm, crash, panic, revulsion, discrediting – have already been sown by the very policies that were needed to address the last downturn."

"The third reason why Gennaioli and Shleifer’s book is important is more technical, and applies directly to the field of economics. Economists have long recognized that requiring one’s representative agent to hold rational expectations of the future tends to produce models that are profoundly inapplicable to the real world. But, until now, no alternative approach has ever gained any traction. Gennaioli and Shleifer’s investors-as-triage-nurses framework shows great promise for being considered alongside other model-building strategies."

"For a decade now, people have been looking for a silver lining to the disasters of 2008-2018, hoping that this period will bring about a more productive integration of finance, behavioral economics, and macroeconomic orthodoxy. So far, they have been searching in vain. But with the publication of A Crisis of Beliefs, there is hope yet."

From The Battalion. "September 2018 marked 10 years since Lehman Brothers filed for bankruptcy, throwing the global financial industry into crisis and sending the U.S. economy into the worst recession since the Great Depression. Some financial professionals predicted the crisis, with varying arguments, according to Anwer Ahmed, the department of accounting’s Ashley ‘88 and David Coolidge ‘87 chair in business."

"With the benefit of hindsight, Ahmed said the financial crisis was deepened by some mix of government policies and private-sector actions."

"'It was a combination of factors including government policies such as keeping interest rates low to stimulate the economy, deregulation of banking and inadequate supervision of markets like the credit default swaps market,' Ahmed said. '[Other factors included] incentive systems that motivated excessive risk-taking and deal-making, insatiable demand for securities that were considered low risk but offered relatively high returns and bursting of the real estate bubble.'"

"Ahmed said the Federal Reserve’s widely unpopular but effective bank bailouts helped put the economy back on track. 'The Federal Reserve had to step in to save the banking system because without that, the crisis would have been worse and more widespread,' Ahmed said."

"At the time of the crisis, assistant professor of finance David Skeie was working at the Federal Reserve Bank of New York, which supervises and regulates financial institutions in addition to its typical role implementing monetary policy. Skeie said despite legitimate criticisms of the decisions that were made by government officials during the crisis, people should keep in mind the entire picture of the situation that these officials were responding to."

"'I think there’s definitely a lot of blame that could go around for what led up to the crisis,' Skeie said. 'But it wasn’t so much anybody particular’s fault. I don’t think anybody was especially negligent in any of these exact different bodies. It’s just simply not thinking outside the box about what potentially could really go wrong.'"

From News.com.au. "A set of worrying conditions known as 'doom loops' could soon trigger a fresh global financial crisis, a leading economist has warned. Dr John Llewellyn, the former chief economist of failed US investment bank Lehman Brothers, made the alarming prediction during a private OECD event last month."

"During the forum, Dr Llewellyn argued economic conditions which could spark a fresh crash were now 'not only serious, but intensifying.' 'Markets run on greed. While greed cannot be eradicated, it can be discouraged. But few financiers have been fined, and almost none have been jailed. Incentives remain unduly skewed towards risk-taking,' said Dr Llewellyn. 'Banks are now better capitalised, but still not sufficiently sound. Banks in Europe can still hold their own national sovereign debt without reserving any capital against it, sustaining the latent ‘doom loop’ between them and often barely-solvent sovereigns.'"

"And according to Dr Llewellyn, a combination of greed, debt at an 'all time high, irrational exuberance' and low interest rates were working together to push the world to the brink of financial crisis."

"He said the US is 'particularly at risk' due to its 'complex and unwieldy' regulatory system, and that decision makers were failing to pick up the warning signs. 'There is scant evidence of policymakers being able to recognise the early symptoms, let alone respond,' he warned."

"For several years now, Australian economist John Adams has warned of a looming global crash, based on record levels of public and private debt, ultra-low interest rates, excessive public spending and a massive housing bubble, among other indicators. The former Coalition adviser told news.com.au 'doom loops' was a new term for an 'obvious economic problem.'"

"Mr Adams said the world was now 'drenched in debt' and experiencing the 'biggest financial bubble in world history.' 'As interest rates continue to go up around the world, there will be individuals and institutions who will end up defaulting because they can’t make interest and principal repayments,' he predicted."