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Thursday 1 October 2009

The one economist who has emerged from the current troubles with his reputation not only intact but enhanced is, of course, Keynes. Every major nation, no matter its economic or political system, has followed Keynes’s prescription for combating a major downturn: increasing public spending to fill the gap created by the decline of private spending. That is why the world economy seems to be inching back from collapse and why the nations that have spent the most, China in particular, seem to be recovering fastest. But Keynes’s vision has yet to reestablish itself among economists, who, like the Catholic Church in Galileo’s time, aren’t about to change their cosmology just because the facts demonstrate that they happen to be wrong. The quants at the banking houses say that they simply failed to sufficiently factor some risks into their mathematical models. Once they do, their system will be corrected, and banks can resume their campaign to securitize everything (as some banks are already doing by establishing a secondary market in life insurance policies). Harold Meyerson

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