That’s the good question posed by the always-thoughtful David Warsh, proprietor of Economic Principals. Here is his lead:
How peculiar is it that the leading introductory economics texts scarcely mention the cycles of manias, panics, and crashes that have been a familiar feature of global capitalism since its emergence in the 17th century?
No propensity to bubble or bail is among the ten big ideas that govern economics in N. Gregory Mankiw’s text, for example. Ben Bernanke, in the book he wrote with Robert Frank before he became chairman of the Fed, discusses the 1990′s banking crisis in Japan, the dot-com episode in the U.S., and the Argentine collapse in 2001, along with the Great Depression, on which he is an expert; he even mentions in passing the “reckless lending” that led to the U.S. savings and loan crisis in the 1980′s: but the tendency to repeated financial crises is not remarked, and neither “bubble” nor “credit crunch” appear in the glossary.
There’s a lucid discussion of banking panics in Paul Krugman’s principles text with Robin Wells; he asks whether the Fed should have sought to puncture the stock bubble of the late 1990′s: but the “sovereign debt bomb” of the 1970′s and the S&L crisis of the 1980′s have disappeared in the dim mists of time. Even Karl Case and Ray Fair don’t make much of a case for the perennial nature of crises (at least in my edition), though Case, of Wellesley College, and his colleague Robert Shiller, of Yale University, have played a prescient and central role in the analysis of the real estate crash.
Some might say that normative economics doesn’t dwell on such crises because they are not normative events; which is exactly why a lot of people don’t like to pay much attention to what most economists have to say about such matters. Any boat is safe in calm seas — just as nearly any economic theory is defensible in calm time; but in crises — well, a lot of good-looking theories tend to get swamped.
Warsh ends his piece with the truest line of all:
It is the next secretary of the U.S. Treasury who will have the really interesting job.
Here’s the latest on whom Obama and McCain might pick.
Early short lists: McCain likes Warren Buffett, Meg Whitman, and John Chambers; Obama likes Tim Geithner, Larry Summers, and Roger Altman. (McCain again touted Whitman in last night’s debate; Obama played it coy.)
There was speculation a while back that Phil Gramm “would almost certainly be Treasury secretary in a McCain administration,” but Gramm probably whined himself out of that possibility.
Although InTrade has written a few contracts on future presidential maneuvers, I don’t yet see a market for Treasury secretaries. Won’t be long, I imagine.
Side note: one characteristic of this financial meltdown that I find noteworthy is the lack of bull-by-the-horns leadership. Bernanke and Paulson are plainly doing their best, but they seem to have inspired very little public confidence.
The president is typically in a position to inspire such confidence, but when Pres. Bush goes on TV these days to talk about the crisis, he seems to be largely ignored. That is what happens when a politician has squandered his political capital. But markets, just like nature, abhor a vacuum. Which is why I suspect that November 5 will be a healthy day for the markets no matter who wins.
and 
. You can also watch it on 
Indeed Mike B.
Also government intervention or the possibility of government intervention suspends actions usually taken by the market players. Instead of selling some MBS on the market today they might benefit from waiting a few weeks till the government decides to buy MBS.
If there is such a de-emphasis on crises in economics textbooks, I suspect it could be the result of any or all of three things:
1. When people are “panicked” their psychology and decision-making changes. Most economics deals with people interacting in “normal” circumstances; the rules of people acting under “panic” either do not exist (since they are irrational and unpredictable) or have not been worked out very well.
2. Most economics textbooks have the goal of explaining the “basics” of the subject (either economics generally or specific segments of it). They are, therefore, by design going to concentrate on “the ordinary rules” of the subject at hand, and on generalities. Crises often represent a violation of these rules or rare circumstances which can violate generalities.
3. Most economics heavily reinforces the mantra that “markets behave rationally.” To focus on people and markets behaving irrationally under “panic,” or in reaction to the unusual conditions of a crisis, runs counter to this supposition.
Now that I think about it, #2 is probably most likely: When I was in college I found that textbooks in many courses conveyed only “basics” which had to be supplemented with information by the professor — which often included “exceptions to the rules” in the subject.
Maybe economists are so invested in the positive nature of capitalism that they consciously or unconsciously avoid talking about the darker aspects of capitalism?
I think it’s mostly human nature to do things like that. Just a thought…
Bernanke and Paulson are “plainly doing their best”- lol- dude, you gotta read the initial bailout plan they submitted to Congress- a 700bil check and a directive to kneel before hank- this of course was bad enough, but it actually put congress in a bind- they were politcally forced to react to the plan, rather than coming up with a better one (see the British plan, which hopefully we will follow)- so now we’re in limbo until the next administration can actually think through how to get out of this mess
It’s remarkable how little the economics profession can contribute to the solution at the moment. Their main theories seem to be as bankrupt as the banks. I hope that academics are being purged as fast as high rolling bankers, or at least they are losing their funding. Their textbooks only teach free market economics: that’s the thinking that got us into this mess. Anyone who wants to learn economics from now on will have to look elsewhere for ideas and theories that relate to the real world and not to some ‘general equilibrium’ utopia. Paul: you must be aware of the problem, what is the state of mind within academia?
The prevailing view is that they are now so knowledgable that it can’t happen again. They are partly right. Its the economists who have bailed out the right wing politicians over the past 40 years. They’ve now reached the bottom of their bag of tricks.
Its time for an asset revaluation to sustainable levels.
If the economic history of the US in the last century can be seen as “the cycles of manias, panics, and crashes” where is this rational behavior that economics is based on? It seems to me that the humans who make up the financial markets are always irrational. They are either irrationally exuberant, panicking or fleeing in fear. Booms, busts & recessions. That is life in America.
#6 – Doug B
When I tutored economics in college, the first thing I said was “economics is mob psychology.” Once my students understood that, they seemed to “get” the basics much better.
And to all that think that economics best explains markets acting “normally,” I’ve found that the true test of any theory or nugget of conventional wisdom is to take it to the extreme. If the theory holds up when under duress, it’s probably worth keeping around. If it fails to explain the extreme, it probably fundamentally fails to explain the mean (although it may coincidentally account for most of the behavior encountered there).