Greenspan and Godley

Michael Stephens | June 26, 2012

Alan Greenspan is apparently writing a book to determine why economic models (all of them, he says) failed to sniff out the financial crisis and ensuing recession. “While the models themselves capture the nonfinancial part of the economy rather well,” says Greenspan, “they’ve been wholly inadequate in understanding how the complex financial system works, both in the United States and globally.”

As it happens, the Levy Institute’s Hyman P. Minsky Summer Seminar just finished up, and last week Gennaro Zezza presented on the stock-flow consistent model used here at the Institute.  The approach embedded in this model, originally inspired by Wynne Godley and still being refined and expanded, is notable for the manner in which it looks at the relationship between finance and the real economy.  For an explanation of its contours and to see how it differs from some of the more orthodox models Greenspan presumably has in mind, this paper by Zezza (“Fiscal Policy and the Economics of Financial Balances”) is a good place to start.  As the paper illustrates, the model has had a pretty good track record.

Godley and Marc Lavoie’s “Monetary Economics” (recently discussed by Lavoie in a twopart interview with Philip Pilkington) describes some of the early challenges with obtaining good data on the financial flows that are part of this approach (pp. 24-25).  But as Godley and Lavoie wrote, “[t]he problem now is not so much the lack of appropriate data … but rather the unwillingness of most mainstream macroeconomists to incorporate these financial flows and capital stocks into their models, obsessed as they are with the representative optimizing microeconomic agent.”


One Response to “Greenspan and Godley”

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  1. Comment by Michael E PicrayJune 26, 2012 at 6:34 pm   Reply

    Don’t know about the economic models, but the liar loans and the gross price distortions in Real Estate were common knowledge for years before the crash. I was offered a job as a mortgage “writer” and told that they’d give me a few hours of “training” and then it was off to the money pits! I declined.

    And the Captains of Finance and Banking like Larry Summers knew darned well that Greenspaz was keeping things rolling along with his “easy money” policies in order to make Clintoon look good… and while the Feds were trying hard to regulate derivatives, summers et al were fighting to prevent them from doing so. (Which they were successful at doing.)

    So again – don’t know about the models but virtually the entire finance world knew about the bubble as it developed. (I was even advising friends and relatives to NOT buy RE as prices were “artificially inflated”.)

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