The Top Ten Lessons of the Global Economic Meltdown
Published on: May 24, 2010
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  • Nancy

    nice recollection

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  • WigWag

    Wow, another brilliant essay from Mead! I hope he will consider packaging some of these blog posts into book form similar to what Tom Friedman of the New York Times did with his columns and his book “Longitudes and Attitudes.” If there is a sager commentator on the contemporary world scene than Mead, I don’t know who it is.

    I do have a slight quibble with this remark that Mead makes,

    “All this change feeds back into the world system in unpredictable ways. Economics can help us understand what is happening and give us more sophisticated tools for investigating the unknown — but it cannot protect us from uncertainty and risk.”

    While economics can’t eliminate uncertainty and risk, it can ameliorate uncertainty and risk. There’s a reason that the great recession of 2009 didn’t turn into a great depression; it’s because the modern economic profession understood the lesson taught by Keynes and acted accordingly.

    When the market crashed in 1929 the government did everything wrong; it actually exacerbated the crisis. While the stimulus provided by Roosevelt’s New Deal didn’t end the crisis it did make a dent and the aggregate demand provided by the massive deficit spending required for World War II ultimately proved that Keynes prescriptions were correct.

    During the recent crisis, Geithner, Summers and Bernanke did everything right. These economists, all steeped in the lessons taught by Keynes and other economists, deftly led the economy out of the woods.

    There’s a reason American banks didn’t fail, unemployment only reached ten percent not 20 percent and great American manufacturing companies like GM lived to fight another day. It’s because trained economists had learned the lessons of previous economic calamities and avoided repeating the mistakes of past eras.

    I think there are two takeaway messages from all of this; (1) Geithner, Summers, Bernanke and even Paulson deserve tremendous credit not the opprobrium directed their way far too often. (2) The economics profession has taught us how to temper the cycles of boom and bust inherent in the capitalist system. While that doesn’t eliminate risk and insecurity entirely, it does make the lives of millions of people better and more secure than they might otherwise be.

    “Bravo” for the economists!

  • Peter

    Excellent ten points, Mr. Mead.

    I’d also add that the era of political correctness is ending; it’s free ride is over.

    From here on out, political correctnessa and its accompanying thought police will have to do the impossibe — justify their dictates to the American public.

  • Luke Lea

    I wonder, Mead, are you familiar with the term “factor-price equalization”? Have you read Samuelson and Stolper’s (sp?) “Protection and Real Wages”? — which is written in plain Englshish and whose results Samuelson himself could hardly believe?

    And then there is Heckscher’s “The Effects of Foreign Trade on the Distribution of Income.” No need to read it though; the title says it all.

    Know what HO theory is? The principle of compensation as it relates to modern neo-classial trade theory? (See Caves and Jones, “World Trade and Payments” which is the classic introductory text on the subject –and accessible to boot!).

    Now maybe you already know all this stuff, but it doesn’t exactly show. Pardon my presumptiousness if I am out on a limb.

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  • Peter from NH

    An absolutely brilliant synopsis of the place where we are and where we are going….

  • noahp

    WigWag: “deftly” led us out of the woods.

    If only. I understand that there is basically no way out for California. They are stuck with paying exorbitant pensions for the next 20-30 years and cannot go bankrupt with a pension fund 500 billion under water!

    Now the Dems are pushing a bill to bail out union pension funds to the tune of 165 billion! I am wondering why my grandchildren owe union members anything!

    Geithner et al sold their professional integrity in the the form of implicit approval of fiscal policies that they surely know are unsustainable while useful idiots like Friedman openly pine for economic dictatorship.

    Neither you nor the estimable Mr. Mead seem to be truly aware of the fix we are in.

  • apetra

    So much of this has been obvious for years, nothing really insightful here.

  • hiscross

    I hope WigWap is joking, because (1) Geithner, Summers, Bernanke and even Paulson with the help of Keynes did do a thing right. Yes, it appears their policies worked, but the results are Not In. Governments do not operate like a business. They operate like some case study. That means they agree amoung them selfs that they are right, but can’t answer the question why their answers are always wrong. In objective practice, governments can’t produce, only take and waste. Keynes was classic cae of not believing his model didn’t work. The US recovered from the Depression in part because of WWII spending, but also because the war didn’t destroy it’s base like was the case in Asia and Europe. Once they recovered by the early 70’s, the US was no longer king. Keynes is a loser and only free markets, even with it’s up and downs can survive.

  • Karl Maier

    Excellent points
    Here are a few things to watch for
    1. The Tea Party movement is the right way to respond; limited government, cut spending, and goring the Blue Beast. (Anti-Trust the Labor Gangs)
    2. The neo-classical equilibrium model of the economy that the mainstream economists and bankers all use is not predictive, and therefore flawed if not outright wrong. Look to Steven Keen (who just won the Paul Revere award for predicting the Global Financial Crisis) and his work on the non-equilibrium model for the future of economics.
    3. Watch the M3 money supply (no longer tracked by the clowns at the Fed), as long as it is shrinking, we are deflating (now at 5%). Deflation is destructive, businesses go bankrupt, unemployment and foreclosures skyrocket. I would rather have double digit inflation than even 1% deflation, as inflation is a pain, but deflation destroys lives.

  • Dennis Byron

    “… If you look hard, you can find a noisy fringe calling, say, for the nationalization of the banks or other old left responses to the crisis, …”

    Like if you “look (real) hard” in Washington DC

  • FairTaxGuy

    Your statement, ” but there is not a single free country in the world where serious political parties argue that socialist transformation will cure the economy’s ills” ignores what President Obama has said, is saying, ans is doing. He is a flat-out advocate of Marxian socialism, and is trying to implement the framework for it during his presidency.

  • M. Report

    Flora’s Wagon of Fools

    Any Fool can steer a ship when the sea is calm.
    Any port in a storm, but ships were meant to sail.

    The crewmen are all rearranging the deck chairs;
    Is there a Captain on board ?

  • alceste

    Butal, but, alas! so true! But has anyone in the White House the courage to grab Obama by collar and force him to read Meade’s paper – I’m afraid that the White House is well on the wind-propelled panglosian wagon of fools of etatism and controlled economy –

  • Richard

    Forgot one lesson: Keynes was right.

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  • Mario

    Excellent summary but WHAT exactly makes America so able to muddle through the storms where others fail. It certainly can’t be that we are all unified in a common set of goals. The Constitution is the only thing realistically keeping us from tearing each other apart. Yet, other countries have Constitutions. I don’t know if they swear an oath to protect it like we do. Is it our spastic/elastic American language that keeps our imagination nimble and able to roll with the punches and make a better future despite adversity? More than a few foreign citizens are happy to help us fail. We do our level best to sabotage our own interests be it in education, finance, foreign policy, politics but somehow we end up STRONGER in spite of these problems. Did God really “bless America” THAT much like the the song says? Are Europeans really that wedded to unworkable ideas that they would rather commit mutual suicide rather than change course? I know. Lots of questions. But seriously, what essential thing makes America so damn different. Just luck?!? I’m sure de Tocqueville had plenty of ideas but sadly I haven’t read him.

  • MaxMBJ

    Keynes was right? Yeah, those bailouts and TARP money sure have been doing the job.

    Next time I play Monopoly I’ll start by dividing up all the bank’s money. That should stimulate some buying, eh?

  • AG

    A very thoughtful, Realist approach, well informed by behavioral finance and history. It’s sad that I am surprised by an essay like this. It just goes to show how much bull is out there…well done Mead

  • Truth Teller

    Great column. I can’t resist pointing out, however, that at the end of Point 1, you favorably cite a column by Fareed Zakaria, but earlier in the paragraph you heap scorn on those who declared that the “post-American world” was upon us.

    Now, let’s see. Remind me again who wrote a bestselling book with that title?

  • bluerider

    Amazing!…that Mead can delineate what he considers the most important lessons derived from the Great Recession, with nary a mention of the role of human greed in the fiasco. Shouldn’t that be the paramount lesson learned? Or maybe that we should reconsider whether or not the telos of neoliberal economic policy leads towards “the end of history,” to use Fukayama’s regnant term denoting capitalist utopia? And how can Mead assure us that liberal capitalism really does work, only to say a few steps later that NO ONE can understand the world economy and its financial markets? What if 2008 is a grim portent of greater economic calamities in the future? Amazing that Mead and many of the commentators are suffering from historical amnesia so soon after the trauma….

  • Dana H.

    This article contains some good insights mixed in with a fair bit of baloney. In the baloney category: “The idea that liberal capitalism would produce a stable and secure world of low risk, rising living standards and increased economic equality has been proved wrong.”

    Replace “liberal capitalism” with “the modern mixed economy welfare state” and the sentence becomes true. The problem today, both in the U.S. and abroad, is that there is far too little capitalism, which dampens crises, and far too much government intervention, which magnifies them.

    Here’s a good article on the subject from the Ayn Rand Center, entitled “Stop Blaming Capitalism for Government Failures”:

  • I grew up the son of a Keynesian economist in the 50s who’s major concern in the 30s was that America looked like it was going to end up fascist or communist. He was very pleased by the 50s with the results of what Keynes called a ‘middle way’ between the two. He credited Keynes and FDR with saving capitalism. Growing up with these ideas I couldn’t help but notice that both Bush and Obama have, like the proverbial generals, refought the last depression. Using every weapon in the Keynesian arsenal. And while I just don’t know how good or bad a job they have done it is obvious that they have not failed – yet – and even look like they could succeed.

    I believe that Keynes introduced what I call regulated capitalism and that since WWII it has succeeded in a variety of forms from American’s high octane capitalism to European social democracy and in many other variants such as Japan’s culturally unique cartel system to China’s post socialist state managed economy. (You can generally recognize a successful regulated capitalist economy by the quality of the cars produced.) What we are seeing now is the tendency of capitalist economies to collapse – not from inner contradictions like the struggle between social classes – but from what the much praised and maligned Alan Greenspan called ‘irrational exuberance.’ Like the Dutch experienced in 1630. Then there is the contribution of the darker side of human nature – the degenerative role of corruption. I think we are seeing quite a bit of that too.

  • Fred

    Re: “Civil servants do not and should not lose the right to vote ”

    The former is certainly true; the latter, however, is not proven. Just as we do not allow judges to render decisions in trials over issues in which they have a financial stake, it seems to be that it is quite defensible to demand that civil servants (and military personnel and welfare/social security recipients) are similarly recused from exercising the franchise in those elections which directly affect their finances.

    So military personnel could vote in local, but not federal, elections; city and county employees could vote in state and federal, but not local, elections; &c.

    This would, I think, go a long way towards dismantling the ‘vote yourself money’ culture.

  • Optimus Maximus

    Great article with one exception. There is one ecomomic model out there that is much more accurate and predictive than the Keynes model, with which the author and others seem so enamored, That would be the Austrian model as taught by Mises. Hagel and others. It gets little press because it advocates free markets and sound money, which severely limits the power of the Fed and State governments to spend beyond their means. Keynes should be throughly discredited by this pointin time, as his policies simply lead to misallocation of resources and delayed recovery..

  • This is an excellent top 10 list, but I would note that while no individual understands any economy, the Austrian economists understand economic principles which is why they accurately predicted this crisis and they’re predicting we’re still going downhill.

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  • Dave L

    bluerider @ 0416 – I re-read F Fukuyama (End of History and the Last Man) recently. I wonder if Mr.Mead, or other economists, feel that liberal capitalism (as defined by Fukuyama) is, in fact, the acme of mankinds economic evolution?

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  • Thogwummpy

    Curiously, the number one lesson is absent: fiscal responsiblity should trump reckless government-mandated social engineering. I mean, HELLO!?!?! This whole mess started because the do-gooder progressives thru force of regulatory pressure on lending institutions, created a subprime mortgage bubble…thinking it “fair” to let low-acheivers end-run the system in order to buy houses they knew they couldn’t afford. That was the whole systemic cancer—with Fannie and Freddie (along with HUD) enabling the entire house of cards. Since this was the documented cause—why doesn’t Mead rank it the top lesson? OH…..that’s right….agenda.

  • Bill

    I agree with most of this, but would just question point #2 about liberal capitalism. Mead writes:

    “The crisis did what crises usually do: it tested the world’s companies, governments and currencies to see what they were made of. The preliminary results of that test are now in, and the United States again looks surprisingly healthy. The dollar held up well during the crash; when the chips were down investors still thought America was the best place for their money. America’s flexible labor markets meant that a lot of people lost their jobs, but also that the recovery would start more quickly here. The overwhelming lesson of the crash for Europeans is that they need to accelerate Europe’s slow and painful shift toward a more liberal form of capitalism. Europe’s socialist parties in Spain and Greece are introducing hated liberal reforms because, as Margaret Thatcher put it long ago, “there is no alternative.””

    Alright, perhaps the definition of ‘liberal capitalism’ is important here, but it seems to me that what was tested in the U.S. was the resilience of government more than companies, and I think the latter is much more reflective of the health of U.S. ‘liberal’ capitalism. Let’s face it – many companies would have failed without government intervention: banks, auto companies, AIG, etc. Moreover, the crisis trampled on much-heralded economic theories (e.g., efficient markets hypothesis) that had been the basis for capitalism’s pre-crisis triumphs; post-crisis, we are left to deal with the limits of economic theory and the limits of capitalism. As we debate a financial regulatory reform bill in the U.S., as well as proposals for global regulations, it seems to me that one major lesson of the meltdown is that capitalism – liberal or otherwise – brings with it excesses and risks that must be regulated by the state. Meanwhile, we are still a country – and a world (looking at you, EU) – of bailouts and phony capitalism.

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  • bluerider

    @DaveL: Well, I’m not familiar with the totality of Mead’s scholarship; all I could do is glean from what he says in his article. And clearly, Mead aligns his views with neoliberal economic policy. In lesson 2 Mead is urging Europe to march in lockstep alongside the US’ upon a neoliberal path (a mere year and a half after the global meltdown!). And Mead cites Thatcher’s declamation that “there is no alternative” to this. Thus a unilinear teleology is at play here, if indeed there is no alternative. This relates to neoliberal Fukayama’s claim: that the end of history is marked by “perpetual peace” owing to capitalism’s victory in its Manichean struggle against its opposite. However, this turned out to be, um.., premature, as Fukayama failed to take into account premodern forces (read: fundamentalism) emerging in a clash with postmodern capitalism (F. has since regretted his ‘end of history’ celebratory thesis).

    @Thogwummpy: dude, c;’mon now.. this whole “Cloward-Piven” business is utter nonsense. There is no shadowy network among C and P, ACORN, and Obama. Where is your empirical evidence? Or did Glenn Beck tell you this? haha. The C-P strategy was written 44 years ago. So….you’re telling me this has been planned all along since the 1960s? Any serious person with merely a scintilla of sophisticated brains can only laugh at this “conspiracy”. LMFAO….

  • Dave L

    [email protected] – thanks your comment. In his book, I think Fukuyama made some allowance for the occassional ‘lapse’ in perpetual peace, although as you indicate, I wonder if he accounted for such virulent strains of ‘premodern forces’ at work in the world today. I was unaware he’d since regretted the conclusion of his thesis. I’ll research further.

    Re: C & P theory – it’s a helluva a conspricacy theory and does make for good entertainment, but seems to border on Kennedy assassination and various other conspiracy theories. Although I disdain their whole concept, I’d hate to give a couple of rabble rousing, 60’s commie, pinkos (granted – that’s over the top) credit for being that prescient and thus the progenitors of the undermining of the entire US capitalist system.

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  • WM

    Our government (and others) caused the crisis by means of enforcing a mark-to-market accounting regime onto the hapless global financial sector. The regulatory framework and other government interferences are the problem. There is no “balance” to be had between regulation and freedom. One is poison, and the other is food. Do you not understand this principle?

    Do not equivocate between laws and regulations. They are totally different animals. One is legitimate and necessary, and the other is not. And in the case of laws which violate individual rights, those are not legitimate or necessary, either.

    The financial crisis is proof that statism in all its forms is dangerous and must be abolished. If you wish to have a proper perspective on history, then view the Tea Party’s efforts with respect, not typical elitist dismissal, and see it as the transformational force which will bring about a safer, wealthier, happier, stable world.

    Let me remind you that everything else has been already been tried, and they have all failed. You have no right to resist laissez-faire now.

  • FS

    What is astonishing in this whole discussion, whether in Mead’s blog or in the comments, is that, aside from snide comments directed at government workers, there is no mention of how the suggested economic policies will affect the lives of people who are not members of the academic/government/financial elite. What history has shown is that free market fundamentalism espoused here has been an disaster for the rest of us.

  • bluerider

    @WM: with all due respect to your opinion, I fail to grasp how “enforcing a mark-to-market accounting regime” by the state (and others) is responsible for the global ec crisis. Who advanced this theory? Any eminent economists endorse it? Seems that such types of monocausal reasoning are severely reductive in the attempt to explain something that is very complicated. If the crisis serves as unimpeachable evidence AGAINST regulation, I’d like to learn about it…

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  • A Baxter

    Very good point that the meltdown does not mean that the leadership of America is over. The issue outstanding is how would this translate into the relations between the U.S., Great Britain and the other Western European allies. This issue was also covered in an article in the Wall Street Journal – “Obama and the ‘Special Relationship’” by William Inboden and Lisa Aronsson of May 19, as a follow-up to the Royal United Services Institute/Legatum conference on the topic “The UK-US Alliance: Still Special or just another Partnership?”. Below is the program of the conference, with similar issues raised.

    The UK-US Alliance: Still Special or just another Partnership?
    A RUSI-Legatum Institute Conference

    18 May 2010
    Royal United Services Institute

    Conference Programme
    0915 Welcome Remarks and Survey Launch
    Sir Paul Lever, Vice President, RUSI
    Dr William Inboden, Senior Vice President, Legatum Institute
    0945 Session One: UK Public Opinion: Political Will for Real Partnership?
    Has the gap over the Iraq War closed and how does the UK public view the US now? Do historically strong ties have a sustainable basis to continue?
    Have recent frictions further eroded ties between the two nations or is there renewed interest in the UK for a closer strategic partnership with the US?
    Does the UK share America’s global vision and do the two powers overlap in their foreign policy approaches? Does the UK see itself as closer to the EU or the US?
    Chair: Bronwen Maddox, Chief Foreign Commentator, The Times
    Speakers: Jeremy Shapiro, Senior Advisor, Bureau of European and Eurasian Affairs, U.S. Department of State
    Professor Peter Feaver, Professor of Political Science, Duke University and former Special Advisor to the National Security Council
    Sir Christopher Meyer, British Ambassador to the United States (1997‐2003)

    1130 Session Two: NATO at a Crossroads? Afghanistan and the Reform Agenda
    Do the US and the UK share the same level of commitment to NATO?
    How can NATO reform decision-making procedures to improve agility, flexibility and responsiveness? Can the consensus principle be re-considered at any level?
    Is it right for Afghanistan to dominate longer-term thinking for defence planning?
    What lessons should the US, NATO and the UK learn from operational experience in Afghanistan since the implementation of the new strategy?
    Chair: Professor Michael Clarke, Director, RUSI
    Speakers: Ambassador Kurt Volker, former United States Permanent Representative to NATO
    Professor Christopher Coker, Professor of International Relations, LSE
    Geoff Hoon, British politician, former Defence Secretary

    1400 Session Three: Renewing the Defence and Intelligence Partnership
    How does defence spending measure up against national priorities and how will cuts in the UK affect the special relationship?
    What lessons can be learned from the American QDR and what are the prospects for new thinking in a foreign policy-led UK Strategic Defence Review?
    How can the US and the UK improve defence co-operation after the Defence Trade Co-operation Treaty?
    What is the state of the intelligence relationship?
    Chair: Dr Alexander Mirtchev, Atlantic Council and Krull Corp.
    Speakers: Dr Edgar Buckley, Senior Vice President for EU, NATO and European Cooperation, Thales
    Sir David Omand, Vice President RUSI, previously Permanent Secretary of the Home Office
    Dr Kori Schake, Research Fellow, Hoover Institution and Former Director for Defense Strategy and Requirements, National Security Council

    1545 Session Four: Evaluating Leadership: Obama and the new British Government
    What will the relationship be between the new UK Government and the Obama Administration?
    Can the UK reject a ‘strategic shrinkage’ despite economic pressures? To what extent do the US and the UK still share global interests, responsibilities and foreign policy approaches?
    How can both sides freshen and deepen their alliance? Will the next UK Government be able to take on a position of leadership in Europe?
    Chair: Dr William Inboden, Senior Vice President, Legatum Institute
    Speakers: Dr Karen Donfried, Executive Vice President of the German Marshall Fund of the United States
    Lord Robertson, former Secretary General of NATO
    Dr Robin Niblett, Director, Chatham House
    Sandra Kaiser, Minister Counselor for Public Affairs, Embassy of the United States, London

  • Yes, it’s a strange brew to mix capitalism and democracy, but an immutable force of nature, i.e., the survival of the fittest ultimately prevails. Thankfully, the fittest is not always the largest or strongest or wealthiest. And while everyone’s interests are rarely perfectly aligned, the fact that we can peacefully replace lousy politicians and bad CEOs make our system the most resilient in the history of the world. There is no end to human stupidity and greed, but so long as we have a free press, free elections, and reasonably free markets, we will endure.

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  • Sinner

    If you look hard, you can find a noisy fringe calling, say, for the nationalization of the banks

    In the UK and US the government most certainly did nationalise the banks!. In the US you just didn’t call a spade a spade.

    Of course, this has clearly made things worse, rather than better.

    Civil servants do not and should not lose the right to vote when they take government jobs.

    On the contrary, civil servants, welfare recipients and all other beneficiaries of taxes (except for police and military) must lose their right to vote or the integrity of the franchise is destroyed.

    As the Tea Party says:

    No Representation without Taxation!

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  • Bill Casper

    This list is interesting but simply diversionary The “leadership” of this nation has forsaken integrity,character and individualism, for academic mumbo jumbo, collectivism, social justice, and pc tolerance for the rude, the crude , the erudite, the pseudo-intellectual, and the maladjusted mediocre. We haven’t learned anything from this depression. The real question is whether or not our oppressors in Washington and Wall Street, can co-opt the US military, to fire upon American patriots when the second revolution begins against the ruling elite! That is the as yet unanswered question

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