Trillion Dollar Economists

Chapter 12Economists, Financial Policy, and Mostly Good Finance

I now come to what is likely to be one of the more controversial chapters in the book, the one dealing with economists and financial policy. Given the many errors in policy in this realm that led to the financial crisis, it is only natural to ask whether economists have had any useful impact on financial policy and, in turn, in promoting business activity in finance that has contributed to the social good, or whether the verdict is all negative.

I take a generally positive view in this chapter, focusing on some key financial policy decisions where I believe economists have been influential and where the business implications have been significant. Where policy mistakes have occurred, mainly in connection with the financial crisis, I do not believe it is fair to blame the economists (except for generally failing to see the crisis coming).

This chapter differs from Chapter 8, which focused on business applications in finance stemming directly from economists’ ideas. Here we concentrate on financial policy as an intermediate condition, or platform, to use the metaphor of the earlier chapters in this section, and examine how those policy decisions affected the business landscape.

There are two broad themes to the policies that most economists advocate for financial firms. Economists generally support more competition, and thus the removal of artificial barriers to entry (such as the Glass–Steagall Act, which once separated ...