The World Financial Crisis of 2008 by Quinn Mills of Harvard Business School and Steven Rosefielde of University of North Carolina at Chapel Hill

QUINN MILLS HARVARD UNIVERSITY STEVEN ROSEFIELDE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL BACKGROUND IN THE DEVELOPED ECONOMIES  DECADES OF A DAMPENING BUSINESS CYCLE  SECULARLY SLOWING GROWTH RATES A MAJOR TRANSITION  THE DEVELOPED ECONOMIES ARE NOW ENTERING A PERIOD OF SIGNIFICANT ECONOMIC FLUCTUATIONS  RECESSION AND DEFLATION  TO AND BACK AGAIN  INFLATION  CAUSES OF THE TRANSITION 1  INAPPROPRIATE MONETARY POLICY  INTEREST RATES TOO LOW TOO LONG THEN SUDDENLY RAISED AT THE WRONG TIME  TOO RAPID GROWTH IN MONEY SUPPLY  INAPPROPRIATE REGULATION OF FINANCIAL SECTOR   TOO HIGH LEVERAGE RATIOS INAPPROPRIATE LENDING STANDARDS  LOANS FOR SPECULATION  SUBPRIME LOANS  YIELDED A FINANCIAL CRISIS CAUSES OF THE TRANSITION 2  INAPPROPRIATE FISCAL POLICY  EXCESSIVE GOVERNMENT SPENDING  EXCESSIVE GOVERNMENT DEFICITS  EXCESSIVE BORROWING  UNDERSAVING IN THE US  DESTABILIZING POLICIES SUCH AS SUBSIDIES FOR SUVs, TAX BENEFITS FOR HEDGE FUND MANAGERS  OVERSAVING IN DEVELOPING WORLD  FINANCIAL IMBALANCES IN WORLD TRADE ROOT CAUSES OF MONETARY POLICY ERRORS 1  INABILITY TO IMPLEMENT POLICY  FED POLICY IS TO USE MONETARY AGGREGATES TO INFLUENCE ECONOMIC PERFORMANCE (MONETARISM OR FRIEDMANISM), but FED  CANNOT ACCURATELY MEASURE MONEY SUPPLY AGGREGATES, due to   EMERGENCE OF NEAR-MONEY INSTRUMENTS INADEQUATE DATA due to  INADEQUATE REPORTING BY FINANCIAL INSTITUTIONS OF VARIOUS TYPES (ESPECIALLY HEDGE FUNDS) ROOT CAUSES OF MONETARY POLICY ERRORS 2 POLITICAL INSISTENCE ON REDUCED REGULATORY STANDARDS  IN THE US  BY REPUBLICANS AS A MATTER OF IDEOLOGY  BY DEMOCRATS AS A MATTER OF POLICY  BY BOTH AS MATTERS OF FUND-RAISING (SEE ESPECIALLY THE FAILURE TO ADEQUATELY REGULATE THE US MORTGAGE-MARKET GOVERNMENT-RELATED FIRMS – FANNIE MAE AND FREDDIE MAC) INCORRECT ANALYSIS OF ECONOMIC SITUATION  INABILITY TO DECIDE WHETHER THE PROBLEM IS INFLATION OR DEFLATION ROOT CAUSES OF FISCAL POLICY ERRORS 1  WISHFUL THINKING – THE EXPECTATION THAT ALL POLITICAL CONSTITUENCIES CAN BE ACCOMODATED WITHOUT MAKING CHOICES THAT BURDEN SOME OR REDUCE THE WELFARE OF THE WHOLE COUNTRY  ERROR OF FISCAL POLICY THEORY  KEYNESIAN ANALYSIS AND RESPONSE ISN’T APPROPRIATE IN THE HIGH EMPLOYMENT CONTEXT (UNEMPLOYMENT RATES ARE LESS THAN 10% NOT GREATER THAN 20%) -- MASSIVE GOVERNMENT SPENDING STIMULUS IS INAPPROPRIATE ROOT CAUSES OF FISCAL POLICY ERRORS 2  DIVERSION OF THE FISCAL POLICY INSTRUMENT TO PRIMARILY POLITICAL PURPOSES    KEYNESIANISM TODAY IS MERELY A RATIONALE FOR OVERSPENDING, FOR WHAT AMERICANS CALL PORKBARREL OR INTEREST GROUP POLITICS; in consequence FISCAL POLICY IS NO LONGER AN ECONOMIC POLICY BUT IS NOW A POLITICAL MECHANISM AS A RESULT FISCAL POLICY NOW HAS A DANGEROUSLY EXPANSIVE BIAS