Lessons from the Crisis: the Macroeconomics of Leverage

Let me advance a possible explanation of the current stagnation and of the preceding crisis and crash. The 2007 crash, generally thought to be of financial origin, is imputed to speculation without regulation and/or to the inevitable eventual failure of otherwise self-fulfilling expectations: surely, there must be more to it, and an ample literature has accordingly developed. In this chapter I shall merely offer hypotheses, unaccompanied by statistical proof. Logic mistakes are likely, but my purpose is to stimulate research by others. In the following argument I will discuss events in the USA and the UK, and to a lesser extent continental Europe (perhaps Japan) - the argument is restricted to something that looks like a closed economy; and, in effect, if a China was not there, I don’t know what part of the following could stand.