The Great Recession: Market Failure or Policy Failure?

Robert L. Hetzel

Apr 2012 · Cambridge University Press

About this ebook

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.

About the author

Robert L. Hetzel is Senior Economist and Policy Adviser in the Research Department of the Federal Reserve Bank of Richmond, where he participates in debates over monetary policy and prepares the Bank's president for meetings of the Federal Open Market Committee. Dr Hetzel's research on monetary policy and the history of central banking has appeared in publications such as the Journal of Money, Credit, and Banking; the Journal of Monetary Economics; the Monetary and Economics Studies series of the Bank of Japan; and the Carnegie-Rochester Conference Series. His writings provided one of the catalysts for the congressional hearings and treasury studies that led to the issuance of Treasury Inflation Protected Securities (TIPS). Dr Hetzel has given seminars or served as a visiting scholar at the Austrian National Bank, the Bank of England, the Bank of Japan, the Bundesbank, the European Central Bank, the National Bank of Hungary and the Center for Research into European Integration in Bonn, Germany. He received his PhD in 1975 from the University of Chicago, where Nobel Laureate Milton Friedman chaired his dissertation committee. Dr Hetzel is author of The Monetary Policy of the Federal Reserve: A History (Cambridge University Press, 2008).