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Some lessons for economists from the financial crisis

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  • Thomas Willett

Abstract

Purpose - The purpose of this paper is to discuss implications of the global crisis for economic and financial research and policy. Design/methodology/approach - The paper reviews many recent studies on the crisis and offers the author's views on some of the most important lessons to be drawn from the crisis Findings - The review counters views that the crisis reflected a basic failure of economics, but agrees that it undercuts some particular theories and approaches to economics. More attention needs to be given to imperfections in the operation of both markets and governments, drawing on insights from behavioral and neuro economics and finance and political economy analysis and recognizing the importance of limited information and uncertainty about correct models. The creation of perverse incentive structures explain a large part of the financial excesses that led to the crisis. Financial considerations need to be integrated much more closely with macroeconomic analysis and financial risk analysis needs to pay more attention to economic considerations. Useful insights can be drawn from many different theories and approaches and we should not expect any one theory to have all the answers. The excesses observed in the advanced economies do not imply that there are not enormous benefits to be gained from further financial liberalization in emerging market economies, but they do show that great care must be taken in establishing strong supervision of such liberalizations and highlight many of the dangers to look out for. Originality/value - The paper offers a guide to the literature for those interested in learning more about the causes and effects of the crisis and policy responses and offers a number of suggestions for fruitful research topics and policy strategies.

Suggested Citation

  • Thomas Willett, 2010. "Some lessons for economists from the financial crisis," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 3(2), pages 186-208, September.
    • Handle: RePEc:eme:igdrpp:v:3:y:2010:i:2:p:186-208
    DOI: 10.1108/17538251011084482
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    References listed on IDEAS

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    1. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
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    Cited by:

    1. Asongu, Simplice, 2015. "Financial development in Africa - a critical examination," MPRA Paper 82131, University Library of Munich, Germany.
    2. Brzezicka Justyna & Wisniewski Radosław, 2014. "Price Bubble In The Real Estate Market - Behavioral Aspects," Real Estate Management and Valuation, Sciendo, vol. 22(1), pages 77-90, March.
    3. Willett, Thomas D. & Srisorn, Nancy, 2014. "The political economy of the Euro crisis: Cognitive biases, faulty mental models, and time inconsistency," Journal of Economics and Business, Elsevier, vol. 76(C), pages 39-54.
    4. Roszkowska Paulina & Prorokowski Łukasz, 2013. "Model of Financial Crisis Contagion: A Survey-based Simulation by Means of the Modified Kaplan-Meier Survival Plots," Folia Oeconomica Stetinensia, Sciendo, vol. 13(1), pages 22-55, December.

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