Mark Thoma has posted the article What Really Happened.

Thoma says the following:

This is from David Warsh (note that, despite Dodd-Frank and other regulatory measures instituted since the financial crises,we are still susceptible to the shadow bank run problems described below):

What Thoma quotes extenively is a review by David Warsh of a book that is soon to be released.

What Really Happened – Economic Principals: …the best economics book on the fall calendar … (to be published next month) is a slender account about the circumstances that led to that near meltdown in September 2008, and an explanation of why they were not apparent until the last moment.

It is very important for people to understand the shadow banking system that was the proximate source of the collapse in 2008.  If you think that the Federal Reserve System is the sole or even the largest source of the U.S. money supply, then you need to educate yourself about the shadow banking system.

It is also instructive to see how economists can create new theories to explain large swaths of history that are based on certain changes to the laws regulating the economy, and then forget that they have to revisit the explanations when the laws revert to what they were before that new explanation was proposed.

I guess, that due to my excessive age, I was able to remember the explanation of what set us on the road to relative economic stability and imagine the consequences of Bill Clinton and the Republican Congress’s repeal of the Glass-Steagall Act.  The Democrats in Congress who vociferously opposed this repeal could see what was coming, too.  Some say that by the time the act was repealed, the system had changed enough to get around the act anyway.  In either case, the outcome was foreseen by many.  The crash of 2008 was that foreseen outcome.

Elizabeth Warren was one of those who were forecasting the crash some years before it happened.  In her in-person political speeches she presents a nice, short history of where we came from in the aftermath of 1930’s depression and how we got ourselves right back into the same fix.  Scott Brown has shown no indication that he has a clue as to what happened.

Mark Thoma has posted the article ‘The Progress is Real’ quoting Paul Krugman.

Thoma adds the insight:

That brings up the second point. Republicans in Congress have blocked efforts to implement fiscal policy measures over and above the initial stimulus effort (and they would have blocked the Fed as well if they had the power to do so). An aggressive infrastructure construction effort would, for example, buttress monetary policy and speed the recovery, and it would also provide benefits (including higher future growth) that exceed costs, but Republicans are not going to let that happen. This is like hiding half of the medicine a patient needs for recovery based upon medical quackery, and then asking why the doctor is doing such a lousy job.

This is the metaphor I always think about, but perhaps Thoma states it better than I would.

I think about the example of the use of anti-biotics. If you are going to use anti-biotics, you must use the full dose. If you don’t use the full does, you leave behind the organisms that were able to survive the partial dose. These are the organisms that mutate into anti-biotic resistant ones. At some point, when you do apply full doses of the previous anti-biotic, they no longer work because of the partial doses that went before.

In the case of the economy, the more often you apply a stimulus that is too weak, the more likely you are to develop an economy that becomes resistant to stimulation. In this case, the stimulus that would have been big enough when you first applied the weak stimulus is now no longer big enough. You now have to apply a stimulus that is even bigger than the one that would have worked in the first instance.

The headline Jack Welch Is Wrong! ‘It’s Outrageous’ to Say the Jobs Number is Manipulated: EPI’s Mishel comes from the interview on Yahoo!’s Daily Ticker pod cast.

“It’s a shock to hear that anybody can think that these numbers were manipulated,” say Lawrence Mishel, president of the Economic Policy Institute, in the accompanying interview with The Daily Ticker. “Having followed these numbers for 25 years and knowing the people who put them out it’s absolutely bizarre…It’s outrageous. The data is based on surveys of tens of thousands of employers and households every month.”

In the interview, Lawrence Mishel called the people who claim the number to be manipulated “despicable”.

Even before you hear what Lawrence Mishel says about the numbers’ non-political import, you can tell by Jack Welch’s response how bad they seem for Republicans’ political ambitions and therefore how good they must be for the economy.

After all, if the numbers could be forced to be manipulated by President Obama, he certainly would not have them manipulated to make himself look bad.

This follows along with the logic of President Obama’s remarks in the debate that Mitt Romney would not keep the details of his economic plans secret because they were too good to tell to the public.

I think that a con-man like Mitt Romney would of course keep his plans secret because the pigeons wouldn’t fall for the plan if they knew the details or knew that the plan did not actually exist. I wonder if the President was being too subtle by not stating the case against Romney the way I just did.

Perhaps the President understands psychology better than I do. People being conned tend to stick up for the con man even more strongly when their judgment is put in doubt by being told by someone else that they are being conned.