Richard Posner's long and rambling critique of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by Akerlof and Shiller has this neat little summary of the causes of the current financial crisis:
There was more than the usual amount of mortgage fraud during the housing bubble, but it was not the cause of many millions of people overpaying for houses, as we know with the benefit of hindsight that they did. Cheap credit and soaring house values were the immediate causes of the bubble and of all that followed when it burst. The underlying causes were the deregulation of financial services; lax enforcement of the remaining regulations; unsound decisions on interest rates by the Federal Reserve; huge budget deficits; the globalization of the finance industry; the financial rewards of risky lending, and competitive pressures to engage in it, in the absence of effective regulation; the overconfidence of economists inside and outside government; and the government's erratic, confidence-destroying improvisational responses to the banking collapse.
That's a pretty good list and includes several failings of the federal government. However, Posner has little or no faith in the ability of other government actions to end the crisis unless those actions inspire a resurgence of "animal spirits." He thinks Akerlof and Shiller inappropriately malign animal spirits as a cause of bubbles, when animal spirits (he prefers the word "confidence") are what we need to end the crisis.
The complexity of a modern economy has defeated efforts to create mathematical models that would enable depressions to be predicted and would provide guidance on how to prevent them or, failing that, to recover from them. The insights of behavioral economics have not done the trick, either. Shiller is to be commended for spotting bubbles, but few if any other behavioral economists noticed them; and he and Akerlof offer no concrete proposals for how we might recover from the current depression and prevent a future one. They want credit loosened, but so does everyone else--so did Keynes, who criticized our government for tightening credit in the early stages of the Great Depression.
We will discover soon enough whether the measures taken by the Obama administration are reviving the animal spirits of producers and consumers. The intentions are good. But the lack of focus, the partisan squabbling, the dizzying policy oscillations, the delays in execution, and the harassment of bankers are bad. By increasing the uncertainty of the business environment, these things are dampening the animal spirits--the courage to reason and act in the face of an uncertain future. Seventy-three years after the publication of The General Theory, it may still be our best guide to recovery from our present distress, not least because of its common-sense psychology.
I detect in Posner's review a dichotomy that I've seen elsewhere: The notion that it is "liberal" to see animal spirits as the cause of our problems and "conservative" to see them as the solution. Could be both, couldn't it?
Thanks to Christine for the link.