Grasping Reality on TypePad, by Brad DeLong

Live at Project Syndicate: U.S. Recession No Longer Improbable: The next recession most likely will not be due to a sudden shift by the Fed from a growth-nurturing to an inflation-fighting policy. Given that visible inflationary pressures probably will not build up by much over the next half-decade, it is more likely that something else will trigger the next downturn.... The culprit will probably be a sudden, sharp “flight to safety” following the revelation of a fundamental weakness in financial markets. That... is the pattern that has been generating downturns since at least 1825, when England’s canal-stock boom collapsed.

Needless to say, the particular nature and form of the next financial shock will be unanticipated. Investors, speculators, and financial institutions are generally hedged against the foreseeable shocks.... The death blow to the global economy in 2008-2009 came not from global imbalances or from the collapse of the mid-2000s housing bubble, but from the concentration of ownership of mortgage-backed securities... Read MOAR at Project Syndicat