Afternoon Must-Read: Paul Krugman: Why Weren’t Alarm Bells Ringing?

Paul Krugman: Why Weren’t Alarm Bells Ringing?: “Focusing, as Martin Wolf does, on the measurable factors–the ‘shifts’–that increased our vulnerability to crisis is incomplete….

…Rising… debt… shadow banking… international imbalances… helped set the stage…. But intellectual shifts–the way economists and policymakers unlearned the hard-won lessons of the Great Depression, the return to pre-Keynesian fallacies and prejudices–arguably played an equally large part…. Say’s Law–the false claim that income is automatically spent–made a comeback. So, incredibly, did liquidationism, the view that any effort to ameliorate the pain of depression would postpone needed adjustment…. When policymakers rejected orthodox economics, what they did by and large was to reject it in favor of doctrines like ‘expansionary austerity’…. And this makes me a bit skeptical about Wolf’s proposals…. The Shifts and the Shocks is an excellent survey of how we arrived at the mess we’re in, and Wolf’s substantive proposals… wide deposit insurance, higher inflation so that the burden of adjustment is better share… are all worthy and laudable. But the gods themselves contend in vain against stupidity. What are the odds that financial reformers can do better?