Explanations of the Financial Meltdown and the Present Recession

Abstract

The concern of this article is to locate the unfolding literature that seeks to explain the present financial crisis into three dimensions of contestability. The major areas of disagreements between various authors include: the role of government; the issues of whether the recession was unavoidable or whether it was inevitable; and the area of ideas and ideals and how economic ideas shaped and influenced the policy process. These explanations include the pragmatists and all that literature that had a time dimension of major actors trying to produce policies that aimed to stabilise the financial markets. These policy makers did not have the benefit of hindsight but were concerned that the financial markets were so fragile that there was no other choice but for governments to intervene. By contrast, there were the market fundamentalists who argued that the pragmatists had got it wrong and were therefore highly critical of the Federal Reserve and the Treasury and tended to blame the recession on government housing policy. Institutionalists have argued that the regulatory system is broken, while structuralists tend to focus on growing income inequalities, the concentration of wealth and how the changing structure explains the recession in the sense that households took the avenue of higher debt on their homes to sustain higher levels of consumption. Finally, there is the Keynesian Collectivist argument that points to the limits of Rational Expectations and Efficient markets. No one really know who is right, but the fierce debate that is emerging is highly important in that each explanation seeks to provide a framework for policy making