The Big Con – Reassessing the "Great" Recession and its "Fix"

29 Pages Posted: 5 Nov 2018 Last revised: 13 Nov 2018

See all articles by Laurence J. Kotlikoff

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Date Written: November 2018

Abstract

Most economists differ, not on the causes of the Great Recession, but on their relative importance. They concur, though, on the basic problem, namely human, not market failure. This study applies the evidence, some new, some old, to re-try the usual suspects. It finds none guilty. Instead, it identifies broadly defined multiple equilibrium, mediated by opacity, false rumors, and panic, as the real culprit. There are many models of bank runs. But each can trigger firing runs – firing someone else’s customers for fear that others are firing your customers. Firing runs, in turn, exacerbate bank runs, producing a vicious cycle. This cycle can be manipulated by those who benefit from economic distress (short sellers). If the banking system, not the banking players is the problem, the solution surely lies in fundamental banking reform. This paper concludes by pointing out that a reform that shifted to 100 percent, equity-financed mutual-fund banking with government-organized, real-time asset verification and disclosure could preclude financial runs and their ability to induce firing runs.

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Suggested Citation

Kotlikoff, Laurence J., The Big Con – Reassessing the "Great" Recession and its "Fix" (November 2018). NBER Working Paper No. w25213. Available at SSRN: https://ssrn.com/abstract=3278513

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

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Boston, MA 02215
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National Bureau of Economic Research (NBER)

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Gaidar Institute for Economic Policy

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Russia

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