Nobel Laureate Eric Maskin gives an extended interview at The Browser arguing that economic theory was indeed equipped to see and understand the roots of the financial crisis.  Its a unique interview because Eric picks 5 or so academic articles, discusses them in detail and weaves together a story of the crisis based on these.  The story has some standard ingredients:  bank runs, moral hazard, liquidity crises, and contagion.  He illustrates each of these with a specific paper.  The story also has some non-standard ingredients, such as leverage cycles described in a paper by Fostel and Geanakoplos.

The interview concludes thusly,

Q: So policymakers, especially people in Congress, need to read these papers.

A: Yes, or at least understand what’s in them. I think most of the pieces for understanding the current financial mess were in place well before the crisis occurred. If only they hadn’t been ignored. We’re not going to eliminate financial crises altogether, but we can certainly do a better job of preventing and containing them.

Highly recommended.

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