The financial theory king is dead. Now what?

Edward Hadas calls for a paradigm shift here and in Fortune. Maybe the whole belief system of free market fundamentalism hasn't collapsed, but the part relating to finance irrefutably has and must be abandoned.

When the financial system crashed, a whole intellectual edifice fell down with it. New economic ideas are desperately wanted.

Hadas doesn't think the answer is to just exhume John Maynard Keynes, which is what everybody else seems to be doing. He calls for new ideas and proposes 3 of his own.

His comments on the passing of the old regime:

It was the belief that largely free financial markets – in old fashioned banking, newfangled investments and international trade – could deliver steady and rapid growth.

. . . .

The hands-off approach to bankers and traders spawned disastrous financial innovations such as negative amortization mortgages and collateralized debt obligations. It also encouraged regulators to ignore fast-rising mountains of leverage and central bankers to watch from the sidelines as asset price bubbles grew and grew.

The confidence in cross-border financial freedom proved at least as misguided.

Update on Tuesday, January 6, 2009 at 10:33AM by Skeptic

In another post, Hadas insists central bankers have to pay attention to asset prices and take "firm countermeasures" to prevent bubbles and imprudent leverage.