Must-Read: Ben Bernanke: Reconstructing Macroeconomics
Must-Read: Reconstructing Macroeconomics: “Bringing financial markets into macroeconomics is obviously critical…:
…I think back at the work I did–that I was involved with academically–and in some ways we had taken steps in that direction… on the role of credit in the Great Depression… the financial accelerator… and so on. But… details really matter…. The decline in wealth associated with the tech bubble bursting [in 2001] and the decline in wealth associated with the decline in house prices as of, say, late 2008 was about the same–maybe even more on the  stock [market] bubble.
From a standard macro model or even one elaborated with financial factors, you would not have really thought that the housing bubble would have been more damaging than the stock bubble. Now the reason it was more damaging, of course, as we know now, is that the credit intermediation system, the financial system, the institutions, the markets, were far more vulnerable to declines in house prices and the related effects on mortgages and so on than they were to the decline in stock prices. It was essentially the destruction of the ability of the financial system to intermediate that was the reason the recession was so much deeper in the second than in the first. To understand that, you really have to know the details of how banks and individual institutions are exposed to housing and to mortgages, in ways that the institutions themselves did not fully understand at the time…