When the US real estate market started tanking, how was the boom supposed to continue? More construction in an over-supplied housing market? Re-train workers overnight and give them jobs in other industries? Transmute wood, concrete, shingles, tractors, bulldozers, and excavators into other materials and tools for other industries?
You do realize that Keynes' departure from 'classical' economics was a model that depended more on aggregate demand than supply, right?
Classical economics (ie. pre-Keynesian economics) would say "just build more". Keynesian economics states that you should stimulate demand (lower interest rates, increase government spending, increase money supply, etc...). Which is exactly what got us out of the recession.
> It blows my mind that Keynesians can't identify busts that were caused by bubbles.
It's not about whether they can or can't. Some obviously did see the bubble coming (some Goldman Sachs traders famously bet against the housing market). The problem is that too many people profit from the 'bubble', and momentum takes people over the edge (because, like it or not, consumers are NOT rational).
It's what caused it in the first place. i.e. 2% interest ninja loans, CRA, "home ownership society", gov't-sponsored entities, etc...
Low interest rates by themselves wouldn't have caused the recession, although rates probably should have been higher during that time period anyway.
Also keep in mind it's only recently that Keynesian and left-wing economics has become fashionable once again...
wat.
We're not out of it, people are just adapting to it.
Think about it.
Anyhow, low-ish interest rates were the norm for most of the US' history, rates will go up, but get used to low rates. Keeping the banks in line (not taking too much leverage) is the key to preventing another bust, not raising interest rates.
Regardless, low interest rates don't mean the US is still in a recession. There's 5% unemployment and the economy is growing. Heck, 2 of Europe's stronger economies (Switzerland and Sweden) have negative rates.
Basically there is a difference between
1. 10 people growing bananas when the economy would be better off with 7 people growing bananas and 3 people growing apples. 2. 9 people growing bananas and 1 person sitting on his butt doing nothing because he can't find a banana growing job. Even though the economy would be better off with 10 banana growers then none.
The problem with recessions is that per person productivity usually goes up but less people are employed. This phenomenon is hard to explain without referencing aggregate demand.
Yep, that simple. That's called investment multiplier, and economists were discussing at the late 00's how it could vary from one company to the other given the Keynes' identities.