LyrArc Article Gist
Mankiw is asked by astudent, why the banks lost 100% of their money if they invested in housing through mortgage securities investments, and housing prices went down only 20%. His answer was the crazy amount of leveraging the banks took on to make higher profits. He points to other changes in teaching Econ 101. The role of financial institutions, the effects of leveraging, the limits of monetary policy when interest rates are already at zero, and the challenge of forecasting. He says economists can't take the blame for missing the crisis completely. In saying this he is saying that economists have only to use what is taught in the classroom, and not use their thinking skills developed through the course of experience in the real world and their intelligence, curiosity and skepticism, all part of an educated mind. It requires some of these skills to tell a bubble when you see one.