Akerlof and Shiller , Animal Spirits. Confidence – Keynes- Minsky Hopes, Exuberance, Fears Waves of optimism and pessimism Corruption - Bad Faith Loss of Trust S&Ls – Enron – Sub-prime Fairness Punish cheaters, even at own expense Relative position Money illusion
Downward wage rigidity
Minsky, JMK, Stabilizing an Unstable Economy, Can “It” Happen Again?
Wage Setting: W = PeF(u,z)
“It is fairly easy now to project the fiscal and monetary stimulus necessary for aggregate demand to be at full employment—if financial markets are freely flowing…But, with the loss of confidence in the financial sector, macroeconomic planners must have a second target…—the amount of credit that would normally be given [to qualified borrowers] if the economy were at full employment.”
Methods: Discount window (TALF)/Capital injections/GSEs
Aside: Also in AER, May 1988. Akerlof and Yellen, Fairness and Unemployment
“…where it is advantageous to pay some employees highly, it is also … fair to pay other employees well.” Unfair pay shirking