Explaining the Great Recession

Professor Tyler Cowen explains that the Great Recession was the result of a number of different problems. While many economists tend to be dedicated to one particular model of downturns, Prof. Cowen finds evidence that elements from many different models played a factor in the recent recession.

He briefly outlines how the following models could be used to explain, in part, the causes of the Great Recession:

  • Keynesian Business Cycle Theory
  • Real Business Cycle Theory
  • Austrian Business Cycle Theory
  • Monetary Policy

As Prof. Cowen says, “When you have Keynesian, aggregate demand, monetarist, Austrian, real business-cycle theories all pushing in the same direction, first an initial boom and then later a subsequent bust, and the economy has a lot of distinct problems, that’s exactly when you get the biggest messes.”

4 Comments

  1. Brian Phillips

    Currently it seems as though the perceived risk premiums are extremely low.  Once the government bailed out the banks through TARP and removed moral hazard, it sent a clear signal that not only will high risk be tolerated, but it will be encouraged with little risk of failure.  

  2. Keith Knight

    Banks only risked so much of their own money because they knew the government would bail them out, banks are so big b/c after decades of the Fed’s regulations being implemented, smaller competitors were unable to comply and whipped out and bigger banks merged

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