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A New Old Explanation For Recessions & Financial Crises

 May 03, 2012 08:44 AM


(By Capital Spectator) Edward Conard, a retired executive of Bain Capital and a major donor to Mitt Romney's presidential campaign, tells us that the precipitating cause of the 2008 financial crisis was a surge in demand for liquidity. He's right, of course. The appetite for safety went into overdrive in the final months of that fateful year. This may be a controversial explanation in some circles, but it shouldn't be. Divisive or not, Conard's accounting of how the economy nearly melted down is an excuse to consider how far we've come (or not) in dissecting the business cycle when it goes negative in the extreme. It's also an opportunity for a refresher course on considering the practical policy responses.

[Related -In A World Of Artificial Liquidity – Cash Is King]

"A lot of people don't realize that what happened in 2008 was nearly identical to what happened in 1929," Conard tells The New York Times Magazine. "Depositors ran to the bank to withdraw their money only to discover, like the citizens of Bedford Falls [in the movie It's a Wonderful Life] that there was no money in the vault. All that money had been lent."

Conard's views would be of minimal interest if he was just another voice in the black hole of economic opinion these days. But as a wealthy individual who's contributed at least $1 million to help Romney reach the White House, his thoughts on the dismal science are destined to attract more than casual scrutiny. In fact, Conard welcomes the attention, considering that he's the author of a new book slated for publication next month--a book that's sure to inflame debate about the nature and role of wealth in America: Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong.

[Related -Did The IMF Provide Support To Syriza?]

As for Conard's views on 2008's meltdown, his argument that the economy was blindsided by a bank run, albeit a 21st century version with lots of moving parts, is largely correct. Granted, the definition of "bank" has expanded dramatically since the days of FDR, but the underlying concept still holds. The details on why everyone suddenly demanded safe assets in late-2008 is a frenzy of debate, however.


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