Titled Curbing Instability: Policy and Regulation, it begins with pointing out the crux of the problem:
...modern macroeconomics presumes that the economybehaves like a stable general equilibrium system. If problems arise in such a system it can only be due to ‘frictions’ or ‘imperfections’ of the sort just mentioned. Once these issues are analyzed, therefore, the macroeconomist would have nothing to add.
This modern macroeconomics is wrong. If it were even roughly right, none of the desperate, improvised ‘non-standard measures’ by treasuries and central banks aimed at preventing unstable processes from overwhelming the markets would have been needed. All traditions of central banking have been abandoned and every line of demarcation between central banks and treasuries transgressed in the last 20 months. It is not to overcome ‘frictions’ that the authorities have been pouring trillions of dollars, pounds and euros into the world economy.
Axel's paper takes on a very different macroeconomic perspective and focuses on the instabilities of the system that the crisis has revealed.
There are Three points of instability:
- Potential instability of the price level under present arrangements.
- Instability of system-wide leverage.
- Increased global connectivity of the system and the lack of any clear boundary for the responsibilities of central banks.
Once this is understood the prescriptions become clearer, though may not be palatable to the finance guys.