Seems to me like the Shaman was getting payola from the Fishermen.

End of life care. The horror stories are legion - very ill people given surgeries and interventions that would be risky even for a healthy person. I have two suggestions: Do Not Intervene orders, and Palliative Care. "Do Not Intervene" Doctors are used to this. There are ethics committees in hospitals, for example, that review DNR (do not resuscitate) orders. We can expand the notion of DNR to DNI - do not intervene. Not all families will agree with a DNI recommendation. Not all hospitals or practitioners will agree either. So let's do the following: 1) Provider of insurance implements some basic rules that initiate a DNI. 2) Health-care provider can respond yes or no - either response gets reviewed by an ethics panel. 3) Families/Hospitals who object can appeal or can elect to pay for intervention using some other mechanism (perhaps there will be DNI insurance). "Palliative Care" Hospices and other palliative care must be made available at all hospitals. This makes the transition less traumatic after a DNI. No transportation is required. Paperwork is handled internally. Et cetera. I speak from direct experience - with a brain-damaged child that required 45 days hospitalization after birth, then 7x24 care at home for 4 months, then an emergency room visit and an argument with a doctor who wanted to give him surgery, and finally two more months in an institution where he died - of an upper respiratory virus.

"..until they realize the problem is themselves," Stephen, you are an optimist!

@lark "Germany never fell for such an inane philosophy." I think there is something very important there. But what is it? Is the history of German capital growth so different than that of Anglo-US? In Anglo-US we have the oft-told tale of the transition from land-owning nobility to resource-owning entrepreneurs (including slave-ownership). This history gives a specific notion of the mobility of capital and model of the relations between labor and capital. What is the relevant German social context? Is it like the Scandinavian model, more cooperative in spirit?

I don't think anyone will remember the Paul Ryan thing come 2012. Most have forgotten the bailouts, and even healthcare isn't such a big deal now that the economy is improving. BTW why isn't there more commentary about the effects of the Social Security tax cut? I think Obama could get a lot of votes if he kept that in place for another year!

A very good post, thank you. Transactions-oriented banking would seem to require a transactions-oriented regulatory tool-kit modeled after what is done in best-of-breed trading houses today: transactions that increase corporate risk get capital charges, and transactions that decrease it get capital credits. Note that this policy is applied to *transactions*. The balance-sheet provides the direction and intensity of the charges, but the charge is applied to the transaction. While the details are certainly profoundly complicated, it does seem that transactions-oriented capital regulation has the potential to remediate liquidity problems. The expectations of late-entrants into a crowding market will be dampened by the higher capital charges. Momentum-trading will be less profitable. Counter-cyclic trade charges are a correction to the distribution of expectations of return that are proportional to market depth. It will decrease liquidity demand at precisely the time when liquidity is drying up. If successful this policy allocates the costs of liquidity risk to the late-comers who actually cause the problem, and it protects the capital of the early-adopters who are the innovators in the market. The downside is that this will tend to slow price competition in financial services. But in an industry that experiences 35% annual decline in profit margins, that might actually be a good thing. Extreme volatility in the profitability of financial services has the potential of rather spectacularly bad outcomes, as we have seen.

Regional interests dominate politics. The Republicans that put Reagan and Bush II into the White House are Southern and Western based (here I include Oregon and Washington that are east of the coastal mountain ranges, and the parts of California that have resource-based economies.) Environmental rollbacks were a big agenda of this coalition. The Western states chafed at the environmental regulations of the Nixon-Ford-Carter era that fed into a bitterness about federal control of the majority of the land base of that region. The Southern states focused on "impediments" to economic development.

@save_the_rustbelt: you sound optimistic to my ears. What leads you to assume the money will be spent in the US?

This is why Stiglitz was so dismayed about the lack of prosecution. http://rwer.wordpress.com/2010/11/06/stiglitz-joins-galbraith-in-calling-for-criminal-prosecution-of-bankers/ Any social system can be exploited by psychopaths. Lots of them rise to tops of corporations and countries. The question is how to get them out? 1) Transparency is essential. We have to know what they are doing. 2) Recourse is essential. We have to be able to jail or sue them. The English Magna Carta (with the wonderful long-form title "The Great Charter of the Liberties of England, and of the Liberties of the Forest") was an agreement to reign in a psychopath and became a paradigm for balance of power in so-called Anglo-Saxon societies. I would be very interested to know about other paradigms from other societies.

Dirk - nice piece. There were a couple places where I thought billions should be trillions. Isn't the 2010 budget deficit over $1 trillion? And the Social Security surplus - shouldn't that be 3 trillion?

Summers has to live with his support of Gramm-Leach-Blilely. Someone who claims to know so much economics has to be held responsible for creating an unregulated mechanism for risk-hiding. I do not doubt that Summers was correct about the stimulus: governments (outside the military) just aren't set up for that kind of emergency spending [http://www.voxeu.org/index.php?q=node/5512]. Republicans just voted 700B "for the banks", so it wouldn't look good to oppose 700B "for main street". I'm sure Summers has had an exhausting, gut-wrenching two years. I can't imagine what it would be like being questioned daily by the law-professor-in-chief on something he urgently cares about.

"Social Security has a massive surplus that will last for decades at the least and there is absolutely no problem with the program." Well, that's the narrative, but most of that money was lent to the US GOV to fund operations. It is not an accounting fiction that SS is in surplus?

@Mark Thoma "I think endogenous crisis (leverage Crisis) models that Genakopolis and others have developed take a step in the right direction, but even them I’m not sure they are adequate to capture important network effects at work in a financial meltdown." @Steve Williamson "There's a failure of the New Keynesians, or the New Neoclassical Synthesis to recognize that credit, intermediation, incentives, and monetary frictions are important." Leverage and credit allocation are important and are generally ignored by macro-economic models. I heartily agree. The damning question is: why did (some) economists believe they could advise on monetary policy without having a macro-economy model with a financial sector in it? Another issue leading us (in the US) badly astray is the "free trade" mantra. Political policy plays a huge role in how gains are distributed when there are large fixed costs to production infrastructure, according to Baumol and Gomory. Why do economists want to pretend that we live in a Ricardian world? The mathematics of Baumol-Gomory are very difficult, I'll grant that. (I have a feeling it took Gomory a decade to work it out.) I don't know the literature on Ricardian models - but I do recall being taught it and that there were absolutely no examples of fixed cost anomalies. Couldn't the field at least have acknowledged that Ricardo theory was extremely limited? Couldn't the field have provided concrete examples where the data didn't fit and printed large block-letter warnings in business school text-books? The model of leverage cycles, on the other hand, is so simple that one must conclude that the field had blinders on not to have seen it years ago. (Minsky probably had models like this in mind.) Mark - thanks for publishing this and thanks for your response. Sargeant's interview is a great defense of macro, and your response points to the holes. My reaction is still one of a deep anger at the hubris and the corruption. Economists were offered power far in excess of what their accomplishments could sustain. Some economists went for it. To keep their positions and align themselves with the centers of power, they corrupted the language of the science. The post-ww2 chapter of economics is a very, very mixed bag. Sargeant's arrogant tone fits right in with that zeitgeist. It is astounding that he expresses no humility whatsoever.

It is all about money, folks. Gates and Obama have begun an assault on Defense spending. Guess who is hurt by that? Where else? The in-the-red-states. They get the Defense contracts. They get the farm supports. They get the road building (how are the roads in New York? LA? Boston? San Francisco?). It's not about God. It is about where money gets spent. The rest of the guff and nonsense is about communicating with voting coalitions in those communities -- and they understand the lingo. When you depend on the government, you listen hard to the politicians.

When I took Macro Econ, I was also becoming familiar with the mathematics of optimization. I was incredulous at the Macro-Econ assumptions made: no fixed costs, no transaction costs, homogeneous agents. I decided that Econ must be more about politics than science, and that I didn't have the stomach to deal with the likes of Milton Friedman, et al. Recently I have seen two papers that deal directly with these fixed costs and heterogenous beliefs -- and surprise! If you do model fixed costs (Gomory and Baumol) and heterogeneous agents (Geankoplos) you get some rather surprising results. For instance: there are infinitely many ways of distributing gains from trade; and: asset price bubbles are endogenous whenever you have a spectrum of opinions and investors with access to leverage. Given these pretty fundamental results about equilibrium processes, it seems that there is a whole lot more work to do in macro-economics. We know far too little about the dynamics to criticize each other about high-level inflation vs deflation comments.