Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79459
Authors: 
Barbera, Robert J.
Holtham, Gerald
Year of Publication: 
2012
Series/Report no.: 
Working Paper, Levy Economics Institute 742
Abstract: 
Financial market crises with the threat of a subsequent debt-deflation depression have occurred with increasing regularity in the United States from 1980 through the present. Almost reflexively, when confronted with such circumstances, US institutions and the policymakers that run them have responded in a fashion that has consistently thwarted debt-deflation-depression dynamics. It is true that these remedies, as they succeeded, increasingly contributed to a moral hazard in US and global financial markets that culminated with the crisis that began in 2007. Nonetheless, the straightforward steps taken by established institutions enabled the United States to derail depression dynamics, while European 1930s-style austerity proved as ineffective as it was almost a century ago. Europe's, and specifically Germany's, steadfast refusal to embrace the US recipe has fostered mushrooming economic hardship on the continent. The situation is gruesome, and any serious student of economic history had to have known, given European policy commitments, that it was destined to turn out this way. It is easy to understand why misguided policies drove initial European responses. Economic theory has frowned on Keynes. Economic successes, especially in Germany, offered up the wrong lessons, and enduring angst about inflation was a major distraction. At the outset, the wrong medicine for the wrong disease was to be expected. That is much harder to fathom is why such a poisonous elixir continues to be proffered amid widespread evidence that the patient is dying. Deconstructing cognitive dissonance in other spheres provides an explanation. Not surprisingly, knowing what one wants to happen at home completely informs one's claims concerning what will be good for one's neighbors. In such a construct, the last best hope for Europe is ECB President Mario Draghi. He seems to be able to speak German and yet act European.
Subjects: 
austerity
central banks
economic stability
euro
European Central Bank
eurozone
eurozone debt crisis
financial crisis
financial instability
financial markets
fiscal policy
government policy and regulation
Hyman Minsky
sovereign debt
stabilization
United States
JEL: 
B20
B31
E62
E63
E65
F01
F36
G01
H63
Document Type: 
Working Paper

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