The visible hand in economics

Credit crisis outlines

Posted on: October 2, 2008

Over at Marginal Revolution, Tyler Cowen provides the world with a couple of useful posts:

  • His views on the credit crisis (here),
  • A couple of outlines of the crisis (here) – the first outline (here) is top notch and easy to understand.

I still feel that the main area where government intervention could be beneficial stems from the existence of an asymmetric information problem which is driving us towards a Pareto inferior equilibrium. In English, I think that buyers expectations have become sufficiently poor to put the credit market in a “downward spiral”.

However, in a broader sense I can buy Tyler Cowen’s point that the crisis is more complicated than we can possibly imagine – implying that it is difficult to actually pick how much of a decline in global economic activity will occur, and it is impossible to tell how much of an improvement is associated with solving the asymmetric information problem. However, isn’t this always the case with policies ex-ante?

1 Response to "Credit crisis outlines"

Sorry but his timeline excludes the SEC’s modification of net capital requirements and this was probably the key oversight mistake. The SEC guy’s observation is perfect. Do yourself the favor and find the NYT article and listen to the recording of Henry Paulson, as the head of GoldmanSachs, starting the beginning of the end. I think the quote from the SEC guy is “this could be bad if it doesn’t turn out right.”

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