The liquidity approach to bubbles crises jobless recoveries and involuntary unemployment
Future generations will likely remember the turn of the 21st century as the time when mainstream macroeconomics was about to completely remove money and finance from its models and perished in the attempt. Before the subprime crisis macroeconomic/monetary theory reached a level of pristine perfection according to which central banks could be masters of the (macro) universe by expertly tweaking a policy interest rate (usually a very short-run interest rate) and/or (some) exchange rate. The hard work was not placed on the shoulders of experienced sleuths that would scour every corner of the financial system in search of structural defects. Rather the job fell on the shoulders of bright-eyed PhDs whose main task was to develop computer algorithms that would reveal the deep secrets of models in which money and finance were largely emasculated. Money disappeared from the picture as a policy instrument because it was assumed to be an endogenous variable.