Thinking ahead of the next big crash

George Bitros ()

No 201410, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: The real estate bubble which burst in 2008 in the USA was not exclusively the result of ¯animal spirits?,¯crowed madness? or ¯irrational exuberance?. It resulted primarily because of the specific policies that the government, the Federal Reserve Board, and the regulators pur- sued. Actually, on account of these policies, what happened was not a surprise. It would actua- lly be surprising if it did not happen! The reason for this assessment is that such Central Bank notions as ¯commitment? and ¯credibility? are pious pronouncements that do not amount to much when the push by organised interest groups comes to shove by politicians. In the face of this development, the urgent question is how to prevent the Federal Reserve Board from creating or co- operating in the creation of the next asset bubble, the crash of which may bring down the intern ational monetary system. According to this paper, the solutions range from introducing an extended list of far-reaching institutional reforms to the monetary system in place, to upgrading the con- stitutional status of the Federal Reserve Board by transforming it into a fourth power of gov- ernment, much like the judicial power, to replacing it by a market-based system of money provision and circulation. Which of these solutions is appropriate depends crucially on whether the Federal Reserve Board has control or not of either the money supply or the policy interest rate. But what is utterly inappropriate is not to do anything and wait until the next big crash.

Keywords: Currency areas; dynamics of economic integration; stability equilibrium conditions. (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2014-10
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https://www.dept.aueb.gr/sites/default/files/econ/dokimia/AllDP102014.pdf Released version, 2014 (application/pdf)

Related works:
Journal Article: Thinking Ahead of the Next Big Crash (2015)
Working Paper: Thinking ahead of the next big Crash (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:aeb:wpaper:201410:y:2014

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