Robert Barro's Theory On Rare Events And Asset Prices Has It Backwards

Noah Smith is fresh young economist who has an interesting blog.  He is about to start his teaching career as a professor of financial economics.  Brad DeLong tells him to be careful about his praise of Robert Barro's theory on the effect of rare events on asset prices.  The theory depends upon the assumptions that Barro makes about how investors will interpret the current situation,  and take actions to prepare for the future that they correctly predict.  Brad DeLong shows that Barro's assumptions got it backwards during our most recent asset bubbles.  DeLong does not discuss Barro's concept of Ricardian Equivalence, but his use of the concept to argue against fiscal stimulus in the recession was broadly criticized by economists.