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Noah Smith

What Economists Still Don’t Get About the 2008 Crisis

The general public might understand what causes busts better than the wonks.

There’s no mystery how this ends.

There’s no mystery how this ends.

Source: Watford/Mirrorpix/Getty Iamges

Macroeconomics tends to advance — or, at least, to change — one crisis at a time. The Great Depression discredited the idea that economies were basically self-correcting, and the following decades saw the development of Keynesian theory and the use of fiscal stimulus. The stagflation of the 1970s led to the development of real business cycle models, which saw recessions as the efficient working of the economy, and central bank meddling as likely only to cause inflation. The painful recessions of the early 1980s saw a shift to so-called New Keynesian models, in which monetary policy is the central stabilizing force in the economy.

The housing bubble that peaked in 2006, the financial crisis of 2008, and the Great Recession that followed constitute another crisis. So far, however, it has produced mostly evolution, rather than revolution, in economists’ conception of the business cycle.