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Tuesday, September 13 2011 , Your time is 15:58:00
Andrew Lo, professor of finance at MIT, likened the different financial crisis narratives to Akira Kurosawa’s Rashomon when he recently reviewed 21 books about the financial crisis.
In the movie, a crime is recounted differently by each protagonist. Lo argued that there are “several mutually inconclusive narratives” of the 2008-2009 crisis. Similarly, there are two distinct tales of the Eurozone crisis.
According to the German version of the story, fiscal profligacy is the culprit, and therefore austerity the cure. Moreover, fiscal restraint will restore markets’ confidence. Just look at how well Latvia and Ireland, two countries that swallowed their painful pills, are doing!
This narrative is not without holes: Spain’s problem was not fiscal but private sector profligacy, led by housing. And the German argument holds much better for Greece. But Krugman is right that markets are definitely not rewarding austerity. Besides, I have yet to meet this famous “confidence fairy”.
Graphs 1, 2, 5 and 6 as well as the confidence fairy are from a presentation Paul Krugman gave in Brussels on Thursday.
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