Here's my take on this subject:
Whenever something unpleasant happens to stock prices or the banking system blows up, lots of people ask "What effect will this have on the Real Economy?".
But what is the Real Economy? The Financial Times Lexicon says "The part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets."
Being a simple-minded soul, I did the obvious thing and looked up Unreal Economy in the same place. I received the answer "There were no results for your search. Please try again.".
So there is no such thing as the Unreal Economy, according to the experts at the Financial Times. But actually there is, and its unreality is the cause of our current distress.
Basically, the whole financial system is nothing but a bunch of symbols which are supposed to reflect the underlying reality of wealth creation. During reasonably stable times, this works pretty well, but when a disruptive change to the processes that create wealth happens, the symbolic system becomes detached from the underlying Real Economy. This can have catastrophic consequences.
The global economic system underwent massive disruption during the 1920s as a result of the spread of the techniques of mass production pioneered by Henry Ford and the consequent development of the Consumer Society. The resulting leap in productivity led to a delusional bubble in US stock prices which crashed in 1929, leading to the Great Depression. Ten years of agony only concluded with the outbreak of the Second World War, the deaths of 55 million people and the creation of a new world order.
The Bretton-Woods financial system was built to manage that new world order and it worked pretty well until Richard Nixon started dismantling it in 1971, when he closed the Gold Window, detaching the US dollar from the price of gold. Since then, there has been a concerted campaign to dismantle controls on the free flow of capital, based in the bizarre belief that markets don't need to be regulated. To add to the resulting instability, China has rejoined the global trading system, the Soviet Union has collapsed and the internet has been invented.
The Japanese stock market crashed and burned in 1990 and has never recovered. The "experts" of the Western World decided that the Japanese are weird and incapable of running their financial system and that "it could never happen here". But perhaps the Japanese were just pioneers, after all - 20 years ahead of us?
It seems to me that the experts on the Great Depression such as Ben Bernanke actually haven't a clue what caused it, because their eyes are fixed on the symbolic system while they studiously ignore the underlying reality. As Jalaluddin Rumi said in the 13th century, they are like men watching the movements of a sleeve, not realising that the sleeve moves only because there is an arm inside it. They pay no attention to the existence of the arm, and imagine that rearrangements to the sleeve will obtain the outcomes they desire.
When the Real Economy has changed as dramatically as it has since the 1970s, the symbolic system that is supposed to mirror and manage it needs to be re-designed. Deliberately dismantling the old system without bothering to build a new one just creates massive instability and chaos. The experts in the old system are not qualified to do this and don't even recognise the need to do so.
We need to rethink what wealth is and design new systems that accurately measure it. That means we need to design new forms of money.
In a world where we all have powerful interconnected computers in our pockets, that money needs to work through them. Lots of the work on this new financial architecture has already been done. Mobile money is normal in places like Kenya and Turkey, while the "developed" world pays no attention to it.
If we devoted a fraction of the resources squandered on bailing out defunct banks to the matter, we could have built a viable new financial system already. it isn't that hard, if we start by asking the right questions, instead of tinkering with a clapped out system that makes no sense.
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