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The Great Financial Meltdown would not have surprised the British economist John Maynard Keynes, who died in 1946, for he thought that this was exactly how unregulated markets would behave. The New Economics, as Keynesian economics was known in the United States until it became the Obsolete Economics, was designed to prevent such turbulence. It held that governments should vary taxes and spending to offset any tendency for inflation to rise or output to fall. Keynes argued that the rich were getting very much richer, while the incomes of the rest were stagnating. Profit inflation, fueled by collateralized debt, went together with an income deflation. No one has bettered Keynes in his understanding of the psychology of financial markets.
Keynes accused economics of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future. Keynes wrote in his great book The General Theory of Employment, Interest, and Money in 1936. We disguise this uncertainty from ourselves by assuming that the future will be like the past, that existing opinion correctly sums up future prospects, and by copying what everyone else is doing. But any view of the future based on so flimsy a foundation is liable to sudden and violent changes. And this is exactly what happened in relation to the Great Financial Meltdown.
Keynes was of the opinion that if governments did not take action in this critical point we are to expect a breakdown of the existing structure, with a future we cannot predict. The key to Keynes was his commitment to preserving the market economy by making it work. His main insight was that it might remain a long ti ...