Grasping Reality on TypePad, by Brad DeLong

Ryan Cooper:

How Does Jeff Sachs Explain the Great Recession?: I want to circle back to one particular point…. [Sachs:]

One of the Obama arguments at the time was that the rush in the stimulus program was needed to avoid a Great Depression…. The US economic emergency in late 2008 and early 2009 wasn’t really an aggregate demand crisis but a financial crisis…. The Fed therefore needed to flood the markets with liquidity, which it rightly did….

I was under the impression that the basic consensus economic story of the 2008-9 crisis was that yes, we had a banking crisis… [that] involved the repo market and a bank run driven by institutions, not individuals, but was of basically the same character of financial panics of ages past. And financial panics cause aggregate demand crises. Banks fold up or get very shy with credit, suddenly nonfinancial institutions can’t get loans and they fold up or shrink, leading to layoffs, which means people have less money, which means less total spending, further hurting businesses, in a self-perpetuating cycle…. [S]aying it “wasn’t really an aggregate demand crisis but a financial crisis” is like saying “this man doesn’t have blood loss, he has a gunshot wound!”…

So, Professor Sachs, what did cause the enormous collapse in GDP?… The Great Vacation theory, what?