Do we really have monetary policy figured out? I asked that question in the first
edition of this book, back in 2002. Here is part of the answer: “The Japanese
economy—that miracle of the 1980s—remains stubbornly resistant to traditional
monetary and fiscal fixes, prompting what the Wall Street Journal has called
‘one of the great economic debates of the age.’”
4
Could something similar
happen here?
It did, beginning in 2007. That doesn’t make me a genius (as I’ve also
predicted that the Cubs will win the World Series on multiple occasions). It does
prove that we have not conquered the business cycle (the economic ebb and flow
that leads to periodic recessions). We thought we had it tamed, and then the
financial crisis nearly took us right off the rails. These swings in the economy
take a lot of innocent victims with them.
Ben Bernanke and the Fed seem to have done a lot of things right. What have
they done wrong that we don’t know about yet? Remember, Alan Greenspan
was a genius (keeping inflation in check) until he wasn’t anymore (because loose
money fueled the asset bubbles).
There is a regulatory challenge as well. (The discussions have started, but
we’re not anywhere near a solution.) How do we manage the “systemic risk” in
an interdependent financial system? The iron law of capitalism is that firms that
fail should fail. We did that with Lehman Brothers and it nearly took all of us
with them. The global financial system does not look like a textbook model
where strong firms thrive in a crisis and weak firms fail; it’s more like a group of
mountain climbers tethered together on the edge of a precipice. How do we
allow the market to punish wrongdoers without sending all of us spilling down
the mountain?
In forty years, will “African tigers” refer to wildlife or to development success
