The Big Con – Reassessing the “Great” Recession and its “Fix”

The Big Con – Reassessing the “Great” Recession and its “Fix” by Laurence J. Kotlikoff


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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10 Responses to The Big Con – Reassessing the “Great” Recession and its “Fix”

  1. paul frijters says:

    sounds like he advocates the end of money creation. Furthermore, he seems to want total accountability. And he thinks both can be technically done by a government that has complete information over all assets (needed to be able to do real-time verification).

    In terms of economic systems, that would set us back to, gosh, pre-Florentine times I would think.

    The author doesnt seem to realise it, but he is in effect rediscovering the hazards of limited liability, one of the great capitalist inventions of the Florentine era. His solution to those hazards is to kill it off. Maybe in his next paper he’ll rediscover the benefits of limited liability, bringing his understanding somewhere in the 16th century.

    • Nicholas Gruen says:

      I didn’t know limited liability was a Florentine invention.

      • Don’t know about limited liability but the other great invention that allowed Florentine finance to take off, the numeral Zero – try to imagine percentages without out it- was not a Florentine invention, rather it was the discovery (by Fibonacci )of something that was old news in India.

    • Paul

      Suspect that the articles desire for “100 percent ” equity could simply be a variation on the the ( eternal) puritan-iconoclast desire for certainty and it’s resultant hostility to: theatre , art and finance I. e. All things that are, by definition , not what they, represent.

  2. I am and will always be Not Trampis says:

    I see John Cochrane has linked this.

  3. paul frijters says:

    just a quick follow-up:

    the history of limited liability laws is of course intricate and contested.
    This 1997 article by Robert Hillman contains a lot of information and cultural awareness, including the importance of Roman and Arab legal practises:

    The mentioned Florentine contribution was the 1408 laws that allowed a “societa in accomandit” which limited the liability of shareholders to what they put in. It was an important step towards recognising a company as a legal person that could borrow without underlying assets and of which the losses were no-ones at the point of bankruptcy.
    There are other steps along the way one could mention as pivotal, like the Dutch East India Company, but the basic point is the same: these institutions arose a long time ago and were seen at the time and in hindsight as beneficial to the economy of these places in the longer run. A large reason is that limited liability increases risk-taking: in a situation of “heads I win, tails you lose” I am more likely to flip the coin!

    • Nicholas Gruen says:

      Thanks for that. Even if limited liability, properly done is “heads I win a lot, tails I lose rather less”.

    • Hi Paul
      the following is by the historian-anthropologist Greg Dening
      On Producing Effects

      “Theatre is a fearsome thing for fundamentalists of every sort. For those who believe that the truth is on the surface of things, there is no comfort in having to work for it. To discover, too, that love and hate, good and bad, and all of living can be represented, is to set the mind wondering whether all the world is a stage. Worse, to turn oneself into something else by acting, raises the question what else do we have in our power to transform.”

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