Brad DeLong is right: there are certain things we understood about financial crises and their effects, because we knew where we’d been.
In particular, we understood that the rapid run-up of house prices, coupled with the extension of leverage, posed macroeconomic dangers. We recognized that large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, and that preventing a deep depression required active official intervention as a lender of last resort.
Indeed, we understood that monetarist cures were likely to prove insufficient; that sovereigns need to guarantee each others’ solvency; and that withdrawing support too soon implied enormous dangers. We knew that premature attempts to achieve long-term fiscal balance would worsen the short-term crisis – and thus be counterproductive in the long-run. And we understood that we faced the threat of a jobless recovery, owing to cyclical factors, rather than to structural changes.
But we knew—or should have known—much more than that. We knew that deregulating financial markets, and then creating a no-strings-attached bailout, would create Too Big to Fail banks. We knew that increasing inequality in the distribution of income and wealth would fuel an unsustainable financial bubble and, slowly but surely, lower living standards for a large part of the population. We knew that the combination of stagnant wages and increasing productivity would lead to higher rates of exploitation. We knew that the Reserve Army of the Unemployed and Underemployed would keep wages low and allow profits to rise. And we knew that wealthy individuals and large corporations would fight tooth and nail to pass on the costs of the crises to everyone else.
We knew, in other words, that we’d end up in the Second Great Depression and that the 1 percent would continue to separate themselves from the 99 percent.
And, finally, we knew that we couldn’t trust mainstream economists like “Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers” to help us fully understand or chart a path beyond the crises of capitalism.