Why The Mainstream Fails To Understand Recessions

Tyler Durden's picture

Submitted by Hal Snarr via the Ludwig von Mises Institute,

In a 2010 Bloomberg Television interview, Alan Greenspan said, “The general notion the Fed was propagator of the bubble by monetary policy does not hold up to the evidence. ... Everybody missed it — academia, the Federal Reserve, all regulators.”

Everybody missed it? Not according to Axel Leijonhufvud. In 2008 he wrote, “Operating an interest-targeting regime keying on the CPI, the Fed was lured into keeping interest rates far too low far too long. The result was inflation of asset prices combined with a general deterioration of credit ... a variation on the Austrian overinvestment theme.”[1] Randall Forsyth concurred, writing the following in early 2009, “The Austrians were the ones who could see the seeds of collapse in the successive credit booms, aided and abetted by Fed policies.”[2]


The Failure of the Mainstream

Despite the unprecedented fiscal and monetary action taken by the Bush and Obama administrations, which pushed the per capita budget deficit to more than twice the previous record, and the Fed, which quadrupled its balance sheet,[3] the economy continues to be stuck in a deep recessionary gap. Instead of acknowledging the failure of these actions, policy makers have doubled down. As the Fed continues to print money to buy securities directly from Treasury and hold rates near zero, asset bubbles are reflating,[4] excess reserves have exploded, and bad economic news pushes stock markets ever higher.[5] With the pedal pushed to the metal, economists surveyed by the National Association for Business Economics in 2012 said they wanted current fiscal or monetary policy to continue.[6] A year later, economists in that same survey said monetary policy was about right.[7]

In a 2013 New York Times article,[8] Paul Krugman acknowledged that the housing bubble he prescribed for the 2001 recession[9] had resulted “in the greatest economic crisis since the 1930s,” but called for the Fed to ignore the “babbling barons of bubbleism, and get on with doing [its] job” of fighting high unemployment.

Money printing and low interest rates are part of a much broader problem. The system the Fed oversees is wracked with moral hazard. The FDIC, the Fed being the lender of last resort, the too-big-to-fail doctrine, and mortgage securitization by Fannie and Freddie allow lenders to make riskier loans than they would have otherwise made. Unlike large national banks, credit unions are hesitant to make 30-year fixed rate mortgages. Why? They understand that their net interest margin will be negative if future deposit rates rise above fixed rates on mortgages made years earlier. They also understand that they are too small to be bailed out.

The aforementioned backstops are necessary because fractional reserve banking is inherently unstable. The money that is lent into existence can vanish at a moment’s notice. The bank panic sparked by the Lehman Brothers collapse resulted in a massive shortage of reserves that was filled with a 578 percent increase in discount loans.

Although economic prosperity is linked to core tenets of Austrian economics, namely economic and political freedom,[10] the school is routinely dismissed by mainstream macroeconomists.[11] This is so despite prices falling, quality rising, and consumer choice increasing in markets that are relatively free of government intervention (e.g., cellular phones, televisions, software, and computers). On the other hand, inflation, stagnant quality, inefficiency, or moral hazard is typical of industries regulated, managed, or owned by government (e.g., banking, education, healthcare, and the post office). Thus, it is surprising that the school has not gained wider acceptance. This is perhaps due to mainstream macroeconomics offering sellable solutions. Whereas Austrian economists generally refuse to support politically-popular welfare programs when unemployment is high, mainstream macroeconomists do not. Keynesian “solutions” like public works projects, extensions to unemployment insurance compensation, and payroll tax cuts, are well-received among working-class voters. Supply-side and Chicago-School policy prescriptions, like capital gains tax rate cuts, low interest rates, and deregulation, appeal to investors and entrepreneurs.

Mainstream macroeconomics’ sellable solutions have consequences, which are fixed with additional interventions. The IRS tax code has nearly doubled in length to over 70,000 pages in twenty years.[12] During that same period, over 1.4 million pages have been added to the Federal Register.[13] During the last five years, the Fed has held rates near zero and paid banks to not make loans.[14] Consequently, the accumulation of intervention has coincided with long-run growth slowing to a crawl.

How did mainstream macroeconomics miss it, and why has it doubled down on policies that appear to be setting the table for future asset bubbles and financial crises?

Too much aggregation is mainstream macroeconomics’ fatal conceit.


Capital-Based Macroeconomics

Roger Garrison’s Capital Based Macroeconomics (CBM) avoids mainstream macroeconomics’ fatal conceit by disaggregating economic output by stages of production.[15] Expenditures on first stage capital goods, like rubber and steel, were committed to the production of second stage capital goods two periods ago. Expenditures on second stage capital goods, like tires and engines, were committed to the production of final goods last period. Adding these expenditures gives mainstream macroeconomics’ investment expenditures, which ignores the inter-temporal allocation of resources. Expenditures on final stage goods, like automobiles, are known as consumer expenditures in both macroeconomic views.

Consumption and investment are more realistically modeled as short-run tradeoffs in CBM. When consumers save more, the supply of loanable funds rises. This lowers interest rates and raises investment as consumption and profits fall.

Shrinking profits prompts innovation. Lower interest rates promote the discoveries, production, and adoption of new products and cost-saving technologies.

Unlike in mainstream macroeconomics, wages in CBM’s segmented labor markets do not all fall when GDP declines. Though falling profits decrease labor demand and wages in the final stage, labor demand and wages in earlier stages rise as firms redirect resources. The widening wage differential draws workers to earlier production stages. This migration reduces final stage labor supply and raises earlier stage labor supply, resulting in the final stage wage rising up toward the wages that prevail in earlier expanding stages.

After savings-induced investments have worked their way through the economy, the productive capacity of the economy has expanded, resulting in higher overall consumption. Though this contradicts Keynes’s Paradox of Thrift,[16] it does not work well when government interferes in markets.

Market interventions like social security, minimum wages, food stamps, and interest rate setting reduce savings, and make wages and prices sticky. Because persistently high unemployment is the unintended consequence of these interventions, monetary intervention is enacted to cure it.

When the Fed creates reserves, interest rates fall, investment increases, and savings decline. The wedge that is driven between investment and savings equals the amount of money that the Fed creates. The resulting malinvestment and overconsumption represent a competition for resources, which pushes asset prices ever higher and the economy beyond its productive capacity. This is what Austrians refer to as a Fed-induced boom.



The boom is unsustainable. Investment and consumption are higher than they would have been in the absence of monetary intervention. As asset bubbles inflate, yields increase, but so do inflation expectations. To dampen inflation expectations, the Fed withdraws stimulus. As soon as asset prices start to fall, yields on heavily leveraged assets are negative. As asset prices decline, increasingly more investors are underwater. Loan defaults rise as mortgage payments adjust up with rising interest rates. When asset bubbles pop, the boom becomes the bust.

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gdiamond22's picture

Krugman is the epitome of someone you don't know, have never met, but as soon as you see him, you want to knock him the fuck out.

freewolf7's picture

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

Jackagain's picture

Like for instance trying to explain the Constitution to today's militarized cops....

Boris Alatovkrap's picture

Macro Economist is seldom to understand anything. Macro economist is doctor who is only read chart but is never examine patient, listen to beat of heart rate, or check sound for thoracic cavity. Only is read chart. Why is now so surprise that prediction unreliable, diagnosis is full flaw...!?

Number 156's picture

They seem to better understand recessions when the president is a republican, whereas most people couldn't care less who is the president.
ZH readers understand simple arithmetic and logic, something that escapes the MSM.

I've been engaging in  permanent boycott of CNN MSNBC FOX ABC NBC CBS etc etc...
Anyone care to join? Its easy.

  • Turn off the news.
  • If you're in a waiting room at the doctors office, ask to turn the channel. I do and they usually allow it.
  • Ina laundromat, or in the laundry room in your condo, town home or apartment? Turn that channel too.
  • Turn to unbiased online sources, and put them on your blacklist if you sense bias conflicting with logic and honesty.

Soon, many cable subscribers will be using the modern cable boxes, some of which report your viewing preferences. Be conscious of that, and advertisers will soon flee.

You will know its working when they start hitting up their BFF politicians for subsidies.





Boris Alatovkrap's picture

In USSA, you are have television in waiting room!? You are have waiting room!? In Minsk, we are only to wait in line in hall or outside in cold!

Number 156's picture

I think the cold is more endurable. Hopefully they dont put TV in the hall or outside.

Atomizer's picture

He is clinging on UFO alien invasion strategy. 

/ sarc 

Oracle of Kypseli's picture

Maybe the mainstream does not want to understand it.  

NotApplicable's picture

I hate articles like this. Sad thing is, if you don't play along with the facade of integrity, the MSM brands you a conspiracy theorist.

So, outright evil is replaced with outright stupidity. And we all suffer for it.

Atomizer's picture

MSM, Planet of the Apes news programming model. 

stutes33's picture

99% of people have no idea what it going on....

Grande Tetons's picture

Successfuly explaining a glimmer of truth to the sheep has the same probability of occuring as Stephen Hawking winning the Gold medal in pole vaulting. 

Miffed Microbiologist's picture

I think this is the saddest part and the key to our dilemma. I have wasted the last 4 years trying to convince my cohorts we are headed to dangerous times. 100% failure and only branded myself as a nutty conspiracy theorist. However, after a few interactions with the blue collar class, I have changed my focus. These people are suffering and are under duress. Some are turning to drugs and alcohol but many are struggling and don't know why. My problem is how to present the material to where an average person can understand. Just telling them to read ZH is not effective because most wouldn't understand. Hell, I don't get it a lot of the time. Mr Miffed doesn't agree. Why wake up people if they can't change their circumstances? I look at it differently. May be if the least sophisticated have a basic idea what the problem is they will uses their energies appropriately when the time comes.


Bioscale's picture

I also hope the seeds are already out.

Atomizer's picture

Will give you 12 bananas today, if you purchase from our TV advertisers commercials. 

o.t.p.s's picture

Because Goverment tells them to do so.

SO lets not wake up the people...

earleflorida's picture

excellent article


undercover brother's picture

the mainstream only understands the alphabet to the extent that it allows them to read the teleprompters.   Most of the entire population is no better and have been programmed over the last 20 years to believe an individual's stupidity is someone else's fault and the government should protect everyone from themselves and any personal financial responsibilty.  

SandiaMan's picture

We are the Main Stream. They no longer can be believed.

Kaiser Sousa's picture

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Upton Sinclair

Duc888's picture



"Krugman is the epitome of someone you don't know, have never met, but as soon as you see him, you want to knock him the fuck out."


The guy never produced anything (AFAICT) in his life.  Professional bullshitters are like that.

JustObserving's picture
Why The Mainstream Fails To Understand Recessions

Recession means less spending on advertising. Besides, negative economic truths are so unpatriotic.

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
astoriajoe's picture

OT: India upgrades its gold...to London.


Soon, India, your gold will be put to work for you and provide a current income stream...At least that what I'm sure the paperwork says.


For fucks sake!*&$@*************

magpie's picture

It's more of a query...do you still have gold, or "gold" in Londonistan, sahib ?

Says in the article that they will offload their impure gold to their own folks in India.


astoriajoe's picture

Such a weird article. Its like two different articles jammed together. The top half has nothing to do with the bottom half.

ZerOhead's picture

(Reuters) - The Reserve Bank of India (RBI) said on Wednesday it has sought quotes from banks to swap gold in its own vaults for international-standard gold, aiming to improve the management of its reserves.

 The RBI said the operation would "standardise the gold available with RBI in India with respect to international standards" and the gold acquired would be delivered to its overseas custodian, the Bank of England.

 According to the World Gold Council, India holds the 11th-largest (soon to be only paper) gold reserves of 557 tonnes.

Indias new gold holdings in London (if they actually will exist which they won't) won't last a week before it's on the open market alongside Germany's gold...

cherry picker's picture


Where I lived at the time, on the coast in Baja, money was pouring in for high rise towers (one even had Trumps name on it) and oversize homes like crazy.

Problem is, I didn't see any people around who were potential buyers, just RE types, developers and crews.  Restaurant and bar business did't escalate.  You would think people who would purchase or rent would be flocking down as well

I predicted it would go badly, it di.

That is not economics, just observation and common sense.  The mainstream is sometimes wiser than we give them credit for.

OC Sure's picture

"Think of the fractional reserve counterfeiter as a fisherman. He casts the bait out and reels the catch back in. This is one event. The fisherman would never cast out and walk away not to return, nor could he approach the water and reel in if he had never cast in the first place. Fishing is one event. Thieving by exchanging counterfeit is one event; the "expansion" and "contraction" are the same one event. The thief extracting the catch is one event. The purpose of fishing is not to cast and feed fish any more than the purpose of forcing interest rates lower is to increase production and promote wealth; the purpose of fishing is to catch and the purpose of counterfeiting is to steal." http://ocsure.blogspot.com/2014/06/theft-not-mal-investment.html

DIgnified's picture

They do NOT fail to understand.  They lie.  There is a very distinct difference between relaying informative factual information with which to make decisions and misleading based on your agenda.

Propaganda was legalized.  This affects everything we see in a negative way.  Heres murdered reporter Michael Hastings piece in BuzzFeed:


Peter Pan's picture

The root cause of the financial and economic crises we suffer is due to the misuse and misunderstanding of the role that interest rates play.

So if one wants to understand recessions they need to understand the pivotal nature of interest rates.

SillyWabbits's picture

" One of our agreed-upon fantasies is that we do not have a class system in the United States. The Few who control the Many through Opinion have simply made themselves invisible. They have convinced us that we are a classless society in which everyone can make it."

"Every four years the naive half who vote are encouraged to believe that if we can elect a really nice man or woman President everything will be all right. But it won't be. Any individual who is able to raise $25 million to be considered presidential is not going to be much use to the people at large. He will represent oil, or aerospace, or banking, or whatever moneyed entities are paying for him. Certainly he will never represent the people of the country, and they know it. Hence, the sense of despair throughout the land as incomes fall, businesses fail and there is no redress."

Gore Vidal


" The whole fabric of society will go to wrack if we really lay hands of reform on our rotten institutions. From top to bottom the whole system is a fraud, all of us know it, laborers and capitalists alike, and all of us are consenting parties to it."

Henry Adams  (Both his paternal grandfather, John Quincy Adams, and great grandfather, John Adams, one of the most prominent among the Founding Fathers, had been U.S. Presidents, his maternal grandfather was a millionaire, and another great grandfather, Nathaniel Gorham, signed the Constitution.)


How many individuals actually control and decide what the main stream media actually “understands”.

The editor of a newspaper, or any media outlet for that matter, has the power to decide what events will be reported as "news" and how that news will be interpreted. Because a newspaper(media outlet) is dependent upon advertisers; most newspapers publish what the advertisers support as “newsworthy” and in a light (aka spin) the advertiser finds favorable to its views and causes. Unless an event is reported, it is not "news" and has no existence beyond those initially present; and what is not news cannot possibly become "history". This is why the internet is so heavily feared and monitored. No central control: no single mindset.

During the 1930s, some of the leading intellectuals in America condemned our economic system and pointed to the centrally planned Soviet economy as a model— all this at a time when literally millions of people were starving to death in the Soviet Union, from a famine in a country with some of the richest farmland in Europe and historically a large exporter of food.

New York Times Moscow correspondent Walter Duranty won a Pulitzer Prize for telling the intelligentsia what they wanted to hear— that claims of starvation in the Ukraine were false.

After British journalist Malcolm Muggeridge reported from the Ukraine on the massive deaths from starvation there, he was ostracized after returning to England and unable to find a job.

In the early 1930s, Walter Duranty of the New York Times was in Moscow, covering Joe Stalin the way Joe Stalin wanted to be covered. To maintain favor and access, he expressly denied that there was famine in Ukraine even while millions of Ukrainian Christians were being starved into submission. For his work Duranty won the Pulitzer Prize for journalism.

To this day, the Times remains the most magisterial and respectable of American newspapers.

More than half a century later, when the archives of the Soviet Union were finally opened up under Mikhail Gorbachev, it turned out that no less than six million people had died in that famine— about the same number as the people killed in Hitler's Holocaust.

In America, John Winton, (senior managing editor, New York Times) then the pre-eminent New York journalist, was the guest of honor at a banquet given him by the leaders of his craft. Someone who knew neither the press nor Swinton offered a toast to the independent press. Swinton outraged his colleagues by replying,

The Year Was 1883

“There is no such thing, at this date of the world’s history, in America, as an independent press. You know it and I know it.

There is not one of you who dares to write your honest opinions, and if you did, you know beforehand that it would never appear in print. I am paid weekly for keeping my honest opinion out of the paper I am connected with.

Others of you are paid similar salaries for similar things, and any of you who would be so foolish as to write honest opinions would be out on the streets looking for another job. If I allowed my honest opinions to appear in one issue of my paper, before twenty-four hours my occupation would be gone.

The business of the journalists is to destroy the truth, to lie outright, to pervert, to vilify, to fawn at the feet of mammon, and to sell his country and his race for his daily bread. You know it and I know it, and what folly is this toasting an independent press?

We are the tools and vassals of rich men behind the scenes. We are the jumping jacks, they pull the strings and we dance. Our talents, our possibilities and our lives are all the property of other men. We are intellectual prostitutes.”

In other words, journalists are as afraid of money power as politicians are. This means that public discussion is cramped and warped by unspoken fear — a fear journalists won’t acknowledge, because it embarrasses their pretense of being fearless critics of power. When there are incentives to accuse but no penalties for slander, the result is predictable.

Happy Fourth Of July!

moneybots's picture

"In a 2010 Bloomberg Television interview, Alan Greenspan said, “The general notion the Fed was propagator of the bubble by monetary policy does not hold up to the evidence..."


Greenspan was obviously lying.  Paul Krugman noted before hand that Greenspan needed to create a housing bubble to grow the economy out of the .com bust.

In 2004, Greenspan told home buyers to get adjustable rate mortgages.  Of what business was it of Greenspan's what kind of mortgage a home buyer should get, unless he was promoting a housing bubble, by suggesting people leverage up on ARM's.  In 2005, Greenspan praised bankers for getting buyers into homes they could not afford.  Obviously, Greenspan's monetary policy was geared to creating a housing bubble.

NihilistZero's picture

I think a lot of money could be made making a "Hostel" style torture porn with Greenspan, Bernanke and Krugman look a likes.  If Assault on Wall Street was the action movie take on financial corruption, this coyld be tge horror angle.  Put it on YouTube with sponsor ads and watch the hits rack up.

Jackagain's picture

Paul Krugman < a rat's dingleberry. Speaking of which...


orangegeek's picture

politicians know that bull markets re-elect incumbents


Barry appoints Fed Chair - likely on the condition that the markets will hold


bears boot incumbents - remember Al Gore?


in 1998, markets tanked, so Clinton changed the rules and banks bought brokerages - banks drove Bill into the end of his second term


MSM works for gewbermint - if the MSM doesn't make nice, they don't get their next interview and they are out of a job



The new media is sites like ZH - news comes from back door sources who email their story to fuck the corrupt asshole who uses the MSM to further their bullshit agenda.


MSM is as useless as a one legged person in an ass kicking contest.

kevinearick's picture


The vast majority recognize that they are not going to make the cut, to escape the gravity of perception imposed upon them, and so seek out the game that best suits their position, based upon the perception of others, imprisoning themselves to game theory. Before life begins, they have already lost, of their own free will.

Locked into a distribution of game players, they seek competitive advantage, with weapons happily supplied by others doing the same. The perception of debt, guilt, is simply the best weapon to grow the ponzi, to exploit natural resources among those incapable of seeing beyond the past.

In this game, global family law, a blood knot between enemies and mercenaries, reigns supreme. At the top end of feudalism, marriage contracts are arranged among enemies, who only hate others more than they hate each other and themselves. As you travel down, the civil marriage contract becomes more mercenary in nature; love is contingent, which means that there is no love, just cheap substitutes.

The economy most see, the booms and busts of natural resource exploitation, favoring the FILO organization of History, is no economy at all. It is simply a prison of peer pressure, within which the inmates regulate each other, with relative advancement, in a system that can only fail.

The magician, legacy, and the crowd, the middle class, imprison each other, on a sinking boat, scavenging the planet for resources to exploit, ignoring the future in booms, burning the magician in a superstitious pyre, when the future becomes the present, in bust, only to repeat the process. America simply recycles the scapegoats.

My great sin was to expose the stupidity of the system with nothing more than a ten line algorithm. In the critter’s own law, that could reproduce the entirety of the law, on appeal to SCOTUS, for all to see on a precursor to the Internet. And to verify the process in Canada. Funny, I was legally notified of divorce by e-mail.

This may help some of you. When payments begin on garnishment, the DA is supposed to be notified and pull down the flags on your licenses, in a computer built for the purpose, and once only the State is a party, any judge can resolve the matter. Of course the critters, now pleading freedom and separation, will go to their graves before issuing me another license.

No matter. Some people’s money is worth much more than other’s, and mine is worth nothing; the proprietors will sell me nothing, and labor will give me anything.

I have worked in seven trades, union and non-union, completed four college degrees, and worked for the Navy as a consultant for 25 years, with emergency certifications and as a miscellaneous consultant, because the system can only discharge without intelligent labor, as you are observing.

If you think about it, economics is a circuit of spacetravel, albeit at a snail’s pace, all the critters can tolerate. Each middle class event horizon has characteristic habits, a gravitational character, enforced by debt as income, in a conspiracy of stupid. They all live week to week, whether they care to dwell on the fact or not. Under MAD weaponization, their assets are worth zero if they do not comply.

Under civil law, choice is the illusion the crowd clamors to gain, in an act, expecting the status quo to repeat in its favor. Choosing to kill your own child, to ensure the status quo, is not choice, nor is gathering to watch an empire production. Choice is when your child chooses to ignore the status quo, independence, to seek that which others do not.

The clamor for equality is not about opportunity; it’s about forcing others to accept the status quo, to gain control over production for the sake of consumption. Even if you do split out Capex, under empire conditions, you are still talking about investment in future consumption, which is not investment, although it would be less destructive.

Countries are vertically integrated event horizons, proffering democracy and delivering a ponzi lottery, depending upon immigration for fuel, controlled horizontally by networks of feudalists, fighting feudalists, for the best birthing on the Titanic. California farmers, surrounded by legacy poison, seek profit on drought, new world order same as the old.

The old-timers tend to settle into one event horizon or the other, watching stupid from the time they open their eyes until they close them, looking for talent to advance. Others appear and disappear, in one form or another, place to place, to move you along.

Step out in faith, experience seeking that which others do not, and the bridge will be there, built by those who have always discounted away the empire, with better things to do than collect toys. You can’t choose your parents or your children, but you can choose the future.

If you look, you will find family, in the spacetime of your choosing. A labor of love can only result in economic gain, while others can only result in loss. The only question is timing of recognition. If you want toys, join the sh-show, on a slow crawl to oblivion.

In seven years, with the advantage of the Internet, has anything changed, in the empire?

The only person you can change is yourself, and only with a leap of faith, what becomes a walk into the future, upon a bridge placed there upon expectation of your arrival. If you look, you will see that I gave you the algorithm for revolving the building around the elevator, and traveling between elevators, a long time ago, traveling backwards in time.

You are now at 1971. You might want to make a better decision. At the community level, the debt prison is a mere perception, but real everywhere else, because “all politics is local.” 

“The bank will protect those indebted to the hilt because our economy, now overly reliant on consumerism, cannot afford to make destitute great throngs of shoppers” until it can’t.

The proprietary programmers and doctors build on sand. You do not design the bridge left behind to collapse by accident. Not everyone is quite so stupid as you may have been led to believe.

AdvancingTime's picture

The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality. Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations.

All this can become quite abstract. Economist predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control  economic cycles better than in the past. More on how few people really understand this very important part of our lives in the article below.