The Map and the Territory — INTRODUCTION

1. 1. The Federal Reserve invoked section 13(3) of the Federal Reserve Act for the first time in decades to lend $29 billion to facilitate JPMorgan's acquisition of Bear Stearns on March 16, 2008.
2. 2. The Lehman Brothers failure on September 15, 2008, triggered possibly the greatest financial crisis ever, with short-term financial markets shutting down on a global scale overnight.
3. 3. Economic forecasting is a discipline of probabilities, not certainty, and will never be abandoned because it is an inbred necessity of human nature.
4. 4. Keynes argued that market economies can become dysfunctional and create an underemployment equilibrium, requiring government deficit spending to offset shortfalls in aggregate demand.
5. 5. Financial imbalances are the major cause of modern business cycles, and finance is the most difficult component of an economy to model due to human nature.
6. 6. In the 1970s, stagflation contradicted Keynesian models, leading to the rise of monetarism, which focused on money supply growth as a forecasting tool.
7. 7. Macromodeling failed to foresee the 2008 crisis; the Federal Reserve, IMF, and JPMorgan all missed the recession until it hit.
8. 8. The unemployment rate forecast in January 2009 was 7.0% by end of 2010, but it actually reached 8.5% in December 2011.
9. 9. Animal spirits—euphoria, fear, panic, optimism—can be measured and made an integral part of economic forecasting and policy formulation.
10. 10. The severity of a bursting bubble's destruction is determined by the degree of leverage, not the type of asset that turns toxic.
11. 11. Rising social benefit outlays since 1965 have crowded out private savings almost dollar for dollar, slowing productivity growth and damaging America's economic strength.