Meanwhile, the neglect of finance in macroeconomics has left us badly unprepared for a credit crisis. Central bankers and top academics united in saying that ‘no one saw this coming’. That is patently false: there are alternatives ways of doing economics and clear forewarnings of crisis had been issued by many in fact. Significantly, none of them adhered to the cutting-edge models, and all include the economy’s financial structure in their analysis.
That is now history. But the neglect of credit and debt in economic theory continues to produce muddled policy thinking. Take the tendency to protect banks lock, stock and barrel, at huge costs. The mantra is that if we let banks go bankrupt, that will ruin the economy. This is a nifty inversion of the truth: it is precisely the support for banks’ balance sheets that will prolong our economic woes. But to see this, you need to think about balance sheets – which macroeconomics almost forbids one to do.
