The Financial Crisis, Its Economic Consequences, and How to Get Out of It

This paper proposes a Keynesian view of the current financial crisis, its economic consequences, and solutions to get out of it. We argue that the mainstream economists could not see the crisis coming because of the self-adjusting properties of their economic models. Keynes's theory, on the contrary, emphasizes how fundamental uncertainty inhibits self-regulating mechanisms and is, therefore, far more relevant for understanding the financial and economic meltdowns and finding solutions to solve the current economic issues. We show that the worst thing to do would be to wait blissfully for the automatic return of a purely imaginary "natural order." It is argued in this paper that the memory of the collapse durably curbs all risk-taking decisions; that a degradation of the expected returns of productive investments can even be feared; and that the new regime that may eventually take place may be characterized by relatively high long-term interest rates, a low rate of productive capital accumulation, and significantly high unemployment rates. We argue that this will be the case unless the combined action of the authorities and economic institutions succeed in restoring the "state of confidence," and we suggest leads for how fiscal and monetary policies can do this.