Macroeconomics Case Study

US Financial Crisis: Is Keynesian Economics Still Relevant?

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Abstract:
When the US citizens were rollicking in the soaring optimism of the roaring twenties of the last century, suddenly their economy was caught off-guard in a scary crash at the penultimate year that decade. As it lingered on long, the distilled essence of the reigning classical economics made no sense in that spooky scenario. It stood to ridicule as stark actuality stared to gobble the theory. But no credible alternative framework was in place to lean upon. During those darkening days, in came J.M. Keynes with the bombshell of a book The General Theory of Employment, Interest and Money. It not only demolished many a classical myth such as paradox of thrift, supply creates its own demand, and wage cut expands employment and so on, but also presented a cogent doctrine to lift the economy from slump. Keynes’ brilliant insight could detect that instability is the name of the game in a capitalist economy; and to fight it, the artillery is government intervention – but not to the extent that the Marxists recommended for. The case runs a whole hog of logic and reality as regards efficacy of Keynesian medication when countries are afflicted with economic downturn. As the US financial crisis of 2008 – traced to the housing bubble – cries out for solution and the bailout plan put in place in the name of Keynesianism seems at best half-cock in success, the relevance of Keynes – who guns for direct government intervention – resonates in the powerhouse of policymakers. Whether Keynesian economics is a real remedy for the downslide or whether it is worse than the malady is a stimulating question that the case poses and ponders over. Whether Keynesianism suffers from the ‘Broken Window Fallacy’ or it breaks free the economies of the world from the shackles of slump; whether it masks a debt-driven festering bubble in the underbelly of yet another bigger bubble propped up by yet higher leverage or it truly re-stirs the resources that have gone into forced idleness are the aspects discussed and dissected. In so doing, the case revives the debate apropos the relevance of the great economist even 6 decades after his demise. The counterfoil provided by monetarism, supply-side economics and the Austrian school of thought only sharpens the issue.

Pedagogical Objectives:

• To understand the classical macroeconomic view and classical model of labour market equilibrium
• To analyse why full employment is not the norm of a capitalist economy
• To understand the mechanism of Keynesian economic strategy and Keynesian model of labour market equilibrium
• To debate whether Keynesian economics has again come to claim relevance in the context of the US financial crisis of 2008.

Keywords : US Financial Crisis, Toxic Assets, Housing Bubble, Credit Crisis Indicators, Bailout Plan, Keynesian Economics, John Maynard Keynes, Great Depression, Liquidity Trap, Money Illusion, Monetary Policy, Deficit Financing, Paradox of Thrift, Phillips Curve, Stagflation, Laffer Curve, Broken Window Fallacy

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