In “How Keynes may have helped cause the Financial Crisis,” James Pethokoukis comments on research by Jeffrey Chwieroth and Andrew Walter on banking crises and draws a concerning lesson on the aftermath of Keynes:
Voter expectations that government will “do something” to stabilize the macroeconomy have strengthened the incentive for government to bailout troubled financial institutions. That, in turn, creates moral hazard, too big to fail, and a less risk averse financial sector.
But why have voters become more demanding? Maybe because since World War Two, Keynesians have made great claims about the fiscal capabilities of government to prevent and deal with economic shocks and smooth the business cycle. Voters are merely asking politicians to walk the walk down the path Keynes laid. And despite Keynesian failures, the public’s belief government should take action remains strong.
Oh, the futility of the “do something” mentality, and all the trouble and silliness it’s brought us!