Paola Sapienza and Luigi Zingales
If a modern Rip Van Winkle had fallen asleep two years ago and woken up now, he would wonder what had happened to the U.S. economy. Two years ago we were in the middle of an economic boom. Banks were eager to lend even at the cost of forgoing important covenants and corporate America (and the entire world) was producing at full steam, so much so that commodities prices were rising in anticipation of a future scarcity. Today we are quickly sliding into a deep recession. Banks are not lending and commodity prices are plummeting in expectation of a dramatic slowdown of production throughout the world.
Neoclassical economic models cannot explain this dramatic change. There was no apparent shock to productivity nor a clear slowdown in innovation. Government has kept taxes low. The Federal Reserve has kept interest rates low and cut them even further. What happened?
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