A monetary history of our recent economic travails
More than five years into the depression that is the dominating fact of our economy, we still have no clear picture of its causes.
The consensus is that the bursting of a housing bubble was to blame. Borrowers started to walk away from mortgages based on inflated home prices, and financial companies had to write down the value of securities based on those mortgages. That’s what led to the financial panic of late 2008 and early 2009, and the seizing-up of credit markets in turn sent unemployment soaring. This is the explanation to which President Obama alluded in a July 24 speech on his economic agenda.
Many analysts on the left and right accept this basic story but disagree about what caused the mortgage bubble. Conservatives tend to emphasize Fannie Mae, Freddie Mac, and the Federal Reserve’s low-interest-rate policy. Liberals tend to emphasize predatory lenders who tricked people into borrowing more than they could afford, Wall Streeters who took on too much risk, and regulators who allowed all of it to happen. These are not mutually exclusive explanations, of course, so it is possible to mix and match.
Yet it may be that both sides are mistaken, and mistaken precisely in their point of agreement: that the housing boom and bust is the fundamental explanation for our recent economic troubles. It may be that this crisis was indeed brought to us by government policies, but not the ones that the dominant voices on either side of the political divide have in mind.
If so, it will not be the first time that an economic depression was misunderstood by the people living through it. The modern view of the Great Depression, held by almost everyone in the field of economics, is that monetary contraction was the chief cause of the disaster. At the time, though, the prevailing view was that the depression resulted from a stock-market crash and banking crisis that in turn resulted from financial speculation.
