Econs and Humans

The economy, and economics, are in crisis. A severe recession is upon us, and the Obama Administration, although stuffed full of leading economists, has only the vaguest idea of how to fix it. The bursting of the housing bubble cast in doubt the reigning orthodoxy that financial markets can govern Wall Street. The institutions that fund housing over-extended themselves, granting mortgages to many home buyers who could not afford them. Banks woke up last fall to realize that many of the loans they held were worthless. Some banks failed; others were bailed out by the government. Further lending dried up, and growth reversed. The vast stimulus bill passed by Congress in February is a desperate attempt to restart the economy with a flood of cash. No one is at all sure it will work because panic reigns, an emotion that lies entirely outside conventional economics.

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Lawrence Mead is a visiting scholar at AEI.

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Lawrence M.
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