My title is borrowed shamelessly from Loren Lomasky's philosophical essay on the financial crisis, but my focus is more practical than Lomasky's. What have we learned over the past 5 years about the political economy and public policy of financial crises since the collapse of Lehman Brothers? My opinion on this deviates significantly from the conventional wisdom (consider this summary report from NPR).
My own emphasis could be summed up as "Don't Panic." Our "panic" since 2008 has resulted in a continual trade off of long term economic growth for the promise of short term relief from the required corrections in the market. By 'protecting' an existing set of inefficient institutional arrangments (including the regulatory environment) and in fact reinforcing the existing arrangement, public policies have not solved the financial crisis, but made the US and World economy more vulnerable. Banks that were "too big to fail" in 2008, are now even "bigger". Regulations fueled by passion (and exploited by special interests) rather than sound economic analysis have worsened the economic environment for doing business and for individuals to realize the gains from trade and the gains from innovation.
Rather than restoring the institutions of a robust political economy and a risilient market economy, the policies decisions made first by a Republican administration and then a Democratic administration have pushed us further away from free market principles and closer to a full blown crony capitalist system of special interest politics and corresponding privileges for a few at the expense of the many.
Consider my colleague Larry White's recent discussion of The Federal Reserve and the Rule of Law. As White points out, Federal Reserve and Treasury officials choose to throw everything, including the kitchen sink as the old saying goes, at the problems caused by the financial crisis in search of a remedy except following the rule of law. Of course, following the rule of law as a guiding principle is the exacting standard that F. A. Hayek developed in his The Constitution of Liberty.
My colleagues at the Mercatus Center have been very busy since 2008 studying the causes and consequences of the financial crisis, and analyzing the impact of the various policy remedies recommended. In contemplation of 5 years of lessons learned (or perhaps not learned, so actually of wasted opportunity) by the public policy community since fall 2008, it might make a lot of sense to spend the upcoming weekend reading through the various studies produced by a variety of economists, legal scholars, and policy analysts for Mercauts. A good place to start would be the work by the financial markets working group. Once you work through those different studies, it would make sense to look at the work that has been done on government spending, regulation, and crony capitalism. The research and educational materials that my colleagues at Mercatus have produced over these past 5 years is very impressive to say the least.
I have repeatedly harped over the past 5 years that the framework for understanding the situation we are in is provided not be a renewed interpretation of Keynes's General Theory, but by Hayek's Tiger by the Tail and Buchanan and Wagner's Democracy in Deficit. As we enter the 5 year anniversary mark, that intellectual judgement in my mind remains strong -- these are the 2 most important framing references for understanding our economic and political plight. But in order to explain sluggish labor markets during the recovery we need to add in Casey Mulligan's The Redistribution Recession and to explain the precariousness of the current state of fiscal policy (and its connection to monetary policy) we need to take account of Laurence Kotlikoff's work on the fiscal gap. Debt-deflation cycles may lead to economic malaise, but if in our efforts to forestall the necessary market corrections (remember the recession is the correction) we move away from the principles of fiscal responsibility and sound money it is vital that we remember that it is the debt-inflation cycle that destroys economic systems. To believe otherwise is to succumb to the very same 'economics of illusion' that caused the financial crisis in the first place.
What is it that Einstein said?!
'Insanity: doing the same thing over and over again and expecting different results.'