Feature

Why we need busts with our booms

The most accurate description of the financial crisis is “old-fashioned boom and bust.”

Robert SamuelsonThe Washington Post

“Everyone wants blood” as they cast about for culprits of the financial crisis, said Robert Samuelson. But this search for blame has made us miss its real cause. True, Wall Street bankers “took too many risks,” and yes, Washington’s “aggressive promotion of homeownership” helped create the housing bubble. But the most accurate description of the crisis is “old-fashioned boom and bust.” Beginning in the early 1980s, the economy boomed: Inflation fell, stock and housing prices rose, and consumer spending surged. Whenever a recession loomed—during the Asian financial crisis, for example, and the 2000 tech crash—the Federal Reserve stepped in to smooth out the business cycle. The absence of natural downturns led to “foolish optimism.” Seeing little risk of losses, people “took more risks.’’ Debt ballooned, lending standards eroded, and oversight was relaxed. “The rest, as they say, is history.” Not surprisingly, this explanation doesn’t sit well with economists, who don’t want to admit that their “science” had a hand in the bust. They would rather ignore the glaring evidence that the “promise of modern economics—to extend economic expansions and shorten slumps—can create the conditions for its own failure.”

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