Must-Read: V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe (2008): Facts and Myths about the Financial Crisis of 2008

Must-Read: Is this the most totally clueless macroeconomics paper ever? If not, what is?

V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe (2008): Facts and Myths about the Financial Crisis of 2008:

The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession…. We examine three claims about the… financial crisis… and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds…. Conventional analyses of the Önancial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing…. We argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will fix this market failure.