Arkady
President
This is an old article, but one that, I think, does an incredible job at explaining recessions, by way of telling the story of a recession in a co-op babysitting ring:
http://www.slate.com/articles/business/the_dismal_science/1998/08/babysitting_the_economy.html
The situation used to explain recessions is incredibly simple, but the analogy ends up being very powerful -- not just explaining how central banking policy can address recessions through manipulation of money supply/interest rates, but also how countries can get into "liquidity traps," where even interest rates of zero can't spur economic activity. The article dates to 1998, and was framed in the context of Japan's lost decade. But it applies quite well to the current situation in the US, where we've been in a liquidity trap for years -- even with the federal funds rate having effectively been at zero since 2008, the economic recovery is very slow. In such a situation, low interest rates don't stimulate the economy because of money hoarding.
I hope people here will give that a read, because I think there are a lot of people who think of recessions as righteous punishment for our sins, and imagine that austerity is some sort of penance that will set us right with the economic gods and get things moving again. The simple babysitting scenario can show how recessions actually take hold in ways that have nothing to do with greed or self indulgence, and instead just grow out of technical problems that can have technical solutions.
http://www.slate.com/articles/business/the_dismal_science/1998/08/babysitting_the_economy.html
The situation used to explain recessions is incredibly simple, but the analogy ends up being very powerful -- not just explaining how central banking policy can address recessions through manipulation of money supply/interest rates, but also how countries can get into "liquidity traps," where even interest rates of zero can't spur economic activity. The article dates to 1998, and was framed in the context of Japan's lost decade. But it applies quite well to the current situation in the US, where we've been in a liquidity trap for years -- even with the federal funds rate having effectively been at zero since 2008, the economic recovery is very slow. In such a situation, low interest rates don't stimulate the economy because of money hoarding.
I hope people here will give that a read, because I think there are a lot of people who think of recessions as righteous punishment for our sins, and imagine that austerity is some sort of penance that will set us right with the economic gods and get things moving again. The simple babysitting scenario can show how recessions actually take hold in ways that have nothing to do with greed or self indulgence, and instead just grow out of technical problems that can have technical solutions.
