Sub-Prime Economic Theory
The US Federal Reserve's recent interest-rate cut suggests that it recognizes the inability of conventional economic theory to account for, much less address, the current turmoil in financial markets. But that is a lesson that the European Central Bank appears not to have learned.
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The insistence that those responsible for today’s financial crisis pay a price lest they repeat their mistakes – the so called moral hazard argument – recalls the great American orator William Jennings Bryan’s immortal “cross of gold” speech: “You shall not press down upon the brow of labor a crown of thorns. You shall not crucify mankind upon a cross of gold.” In other words, ordinary people should not be made to suffer for the foibles of policymakers enthralled by some defunct economic theory.