John At The Center

I think where we are is this: every economist can tell a story of a sectoral recession in housing. No economist, from any school of macroeconomics, has a really convincing story of how that recession spread so widely.

One story you could tell is one of self-fulfilling expectations. Every executive says, “We are in for bad times, I need to cut costs in order to survive.” They all behave that way, and you get a deep recession. I can offer a lot of anecdotal evidence in support of this story, and it may be right. But it implies a sort of psychological fragility to the economy that I find a bit hard to credit. It's bad enough to have to believe that our economic decision-makers can't figure out how to handle a little bit of deflation. It's even worse to believe that they are afraid of their own shadow.

via Why Such a Deep Recession?, Arnold Kling EconLog Library of Economics and Liberty.