The Conventional Views of the Global Crisis: A Critical Assessment

Among the conventional interpretations of the economic crisis started in 2007-2008, much attention has been paid to the following two. First, it is argued that the crisis is due to the misguided under-pricing of risk: financial investors ‘played with fire’ by being overconfident about the ability of their mathematical models of measuring and managing risk. Secondly, it is argued that the cause of the crisis is the loose monetary policy of early 2000s, what has also been labelled the ‘Greenspan put’: central banks and especially the Fed came to the rescue of financial markets by lowering the short-run interest rate significantly and consistently. The chapter assesses the merits and the drawbacks of these two conventional causes, looking at the peculiar type of relationship between these explanations and their theoretical frame of reference, namely the New Consensus Macroeconomics (NCM) model.