Supplementary Notespt.4 - 4 Record shows that a) the crisis...

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Supplementary Notes - ‘The Great Recession’ Pt 4 1
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Macroeconomics studies over all economic performance, including prosperity and recession, has basically two major schools, with the classical approach led by Lucas The current Great Recession as outlined in the BBC timeline: Credit Crunch to Downturn has prompted the criticism against economics in the London Economist, with a response by Lucas. Comparing facts against words should shed insight. 2
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3 Lucas chose to defend Keynesians like Mishkin (in forecasting) and Bernanke (on policy), also referred to the insight of Keynes, people he usually took issues with and views he often held as jerry-built. He justified both the use of mathematics, and the repeatedly proven Efficient Market Hypothesis (EMH). The crisis was regarded as unpredictable, and there was not anything mentioned like LESSONS LEARNED.
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Unformatted text preview: 4 Record shows that a) the crisis came since lenders offered teasing rates and (initially) interest only installment plans to sub-prime borrowers. b) the crisis became contagious when financial institutions designed collateralized debt obligations (CDOs), bundling toxic mortgages with other assets, to bait other financial institutions c) the crisis became invisible when insurers like AIG offered to cover defaults risks: banks invested in them. 5 Such risky financial innovations are recent, and were not covered by test for EMH, as mentioned by Lucas. Bernanke might be innovative in suggesting costly remedies, but was criticized for failing to regulate before the crisis. Lucas remained silent on such issues, as well as, whether there is any lesson worth learning....
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This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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Supplementary Notespt.4 - 4 Record shows that a) the crisis...

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