Theories on the Economic Crisis: The Extremes
DOWNWARD SPIRAL SCHOOL
The Problem: Job cuts lead to reductions in consumer spending and business investment, as well as more foreclosures and deeper losses at banks. In turn, these lead to even more job cuts.
The Solution: The federal government must rescue the economy by boosting spending to create jobs and compensate for the drop in private consumption, investment, and lending.
NATURAL EQUILIBRIUM SCHOOL
The Problem: Poor government policy, including too-low interest rates, led to overconstruction of housing and too much debt. Today, the economy is in a messy and painful transition back to a sustainable growth path.
The Solution: The economy will only find a bottom when falling prices and wages make consumer goods, investments, and labor more affordable. For long-term growth, government should cut taxes and regulations.