Craig Kohtz alerted Russ and me, by e-mail, of this June 2011 claim by Larry Summers :
The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending it is only resolved by increases in confidence, borrowing and lending, and spending.
It’s just as if a drunk, waking up severely hung-over, proclaims to his wife
The central irony of my medical crisis is that while it is caused by too much confidence in my ability to hold my drink, and by too much drinking, it can only be resolved with more confidence in my ability to hold my drink, and by more drinking. Bottoms up!
When all you see are conventional macro-aggregates, this view makes some sense. Globs of more or less homogeneous resources made idle today by anxieties raised yesterday by the revelation that recent economic exuberance was irrational. Too much exuberance causes too little; demand for globs of homogeneous resources, once too strong, is now too weak. Just get today’s exuberance up a bit (but take care that it not become irrationally high!) and all will be well. No need to worry about the structure of production, the pattern of relative prices, or the detailed ways that the plans of entrepreneurs, investors, and consumers might be made to mesh reasonably enough well so that the economy again is marked by patterns of sustainable specialization and trade . No. Those are micro-economic phenomena – and we thoroughly modern economists understand that, when dealing with questions of booms and busts, our macro-aggregates are what matter above all.