Introduction
This is a special topic focusing on ideas, theories, and evidence surrounding the Financial Crisis of 2008 and the previous business recessions. Please see Business Cycles for basic definitions and vocabulary, background, and more material on business cycles, recessions, recoveries, booms, busts, bubbles, depressions, fluctuations, economic shocks, financial crises, and trade crises.
Every idea or theory put forth as a cause for this most recent 2008 recession, or any other business recession, contains an implicit recommendation for a cure. The hard part for someone who puts forth an idea, theory, or recommendation is to show that that idea is important enough to matter or to resolve the problem–either for the recent 2008 crisis or more generally other economic crises or recessions.
Economists have worked on the causes and cures for business cycles, recessions, and financial crises since the mid-1800s. As you listen to these podcasts, interviewing dozens of renowned economists, your questions should be: Does this convince me? If it convinces or sways you, then you should take that to heart and ask about it again should it come up the next time there is a recession. Specifically: does your favored theory bear out?
You will not be alone if your favored ideas or theories don’t pan out in the next recession. No economist for the last 200 years has yet figured out what causes or cures recessions. It’s easy to ex-post quarterback. Plenty of theories abound. Economists don’t like to admit that no one has figured out the causes or the cures. If we can’t completely figure out or resolve the repercussions of business cycles, could we make the economy more resilient in the face of these recurring unknowns? Sit back and listen to all the ideas before you throw your own ideas into the ring.
Definitions and Basics
For definitions and basics, please see Business Cycles.
In the News and Examples
- Was the cause of the recent recession and financial crisis or other business cycles a housing bubble? The earliest ideas were that it was a collapse of a housing bubble.
- Was the recent recession and financial crisis a result of the government having a policy deeming some banks “Too Big to Fail”? of not bailing out Lehman Brothers? Bailing out other banks? Are banks too large and should they be forced to break up?
- Was the cause of the financial crisis or recent recession the existence of unusual financial instruments, contracts, financial derivatives or other unusual bank contracts initiated by banking institutions protected by Wall Street or the Federal Reserve? The greed of bankers or speculators? An early claim was that financial derivatives, driven by speculators, Wall Street cronyism, insider deals, or moral hazard, were behind the economic and financial collapse in 2008.
- Was the cause of the financial crisis or other business cycles a reduction of aggregate demand, spending reduction, paradox of thrift, animal spirits, income inequality? What is the multiplier? Is fiscal stimulus the cure for recessions? What was the TARP program; and was too big, too small, effective, ineffective?
- Was the cause of the financial crisis or other business cycles a fragile banking system that was bound to implode eventually, or alternatively an occasional probability of major events?
- Was the cause of the financial crisis triggered by monetary policy by the Federal Reserve? Was a recovery impeded by restrictive monetary policy? What does or should the Federal Reserve target?
- Was the cause of the financial crisis triggered by a buildup of excessive debt that, in the face of a shock, led to fire-sale liquidations of assets and a concomitant contraction in the money supply? Where there fewer, or perhaps different repercussions, during business cycles when there were fixed exchange rate systems in place, such as a gold standard? Could free banking, a gold standard, or disallowing fractional reserves reduce the magnitude, severity, or frequency of business cycle fluctuations?
- Was the cause of the financial crisis or other business cycles what is posited by the Austrian theory of business cycles: a coordination problem across time, and capital-investment-monetary interactions?
- Was the cause of the financial crisis or other business cycles monetary instability, real shocks (non-monetary, supply-side shocks), expectations led astray?
- Was the cause of the financial crisis or other recessions a trade war? International capital flows or international debt?
A Little History: Primary Sources and References
Advanced Resources
Related Topics
Business Cycles
Inflation
Roles of Government
Aggregate Demand