The Great Recession
Market Failure or Policy Failure?

Argues that the 2008–9 recession needs to be understood as deriving from mistakes of central banks and regulators, not financial markets.

Robert L. Hetzel (Author)

9781107011885, Cambridge University Press

Hardback, published 16 April 2012

400 pages, 64 b/w illus. 4 tables
23.5 x 15.7 x 2.5 cm, 0.65 kg

'The Great Recession upends the conventional view that the recession of 2008–2009 was caused by a massive financial market failure. Instead, Robert Hetzel places blame squarely on the Federal Reserve for failing to ease monetary policy aggressively in summer 2008. He argues that the recession intensified before the Lehman Brothers failure and that contractionary monetary policy turned a moderate recession caused by shocks to energy prices and the housing sector into a serious economic contraction. With a rich narrative and provocative history in the spirit of Friedman and Schwartz, Hetzel returns monetary forces to the forefront of business cycle analysis.' David C. Wheelock, Federal Reserve Bank of St Louis

Since publication of Hetzel's The Monetary Policy of the Federal Reserve (Cambridge University Press, 2008), the intellectual consensus that had characterized macroeconomics has disappeared. That consensus emphasized efficient markets, rational expectations and the efficacy of the price system in assuring macroeconomic stability. The 2008–9 recession not only destroyed the professional consensus about the kinds of models required to understand cyclical fluctuations but also revived the credit-cycle or asset-bubble explanations of recession that dominated thinking in the nineteenth century and the first half of the twentieth century. These 'market-disorder' views emphasize excessive risk taking in financial markets and the need for government regulation. The present book argues for the alternative 'monetary-disorder' view of recessions. A review of cyclical instability over the last two centuries places the 2008–9 recession in the monetary-disorder tradition, which focuses on the monetary instability created by central banks rather than on a boom-bust cycle in financial markets.

Preface
1. The 2008–9 recession: market or policymaker failure?
2. Recessions: financial instability or monetary mismanagement?
3. The great contraction: 1929–33
4. Monetary policy and bank runs in the great contraction
5. Vigorous recovery and relapse: 1933–9
6. Inter-war international monetary experiments
7. Identifying the shocks that cause recessions
8. From stop-go to the great moderation
9. Controlling bank risk taking: market or regulator discipline?
10. The housing crash: subsidizing housing and bank risk taking
11. Bubble trouble: easy money in 2003 and 2004?
12. What caused the great recession of 2008–9?
13. What caused the great leverage collapse?
14. The distinctions between credit, monetary, and liquidity policy
15. Fed market interventions: the experiment with credit policy
16. Evaluating policy: what are the relevant counterfactuals?
17. The business cycle: inherent instability or monetary instability?
18. Why is learning so hard?
19. How should society regulate capitalism: rules vs. discretion?

Subject Areas: International business [KJK], Economic history [KCZ], Political economy [KCP], Monetary economics [KCBM], Social & political philosophy [HPS]