The economy could slip back from weak recovery into recession with another negative shock. The administration is pushing a $200 billion stimulus to sustain the growth that they believe that the original stimulus created. Evans-Pritchard quoted Larry Summers, whose words acknowledge the dangers of the expanding deficit, as stating that Congress must "grit its teeth" to pass the stimulus and that it would be "pennywise and pound foolish" to fail to pass it.
In "Crisis and Leviathan," Robert Higgs proposed the crisis hypothesis which states that national crisis increase both the demand for and supply of government regulation of the economy. Evans-Pritchard also interviewed Tim Congdon who believes that regulation comes at a cost...
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.Steven Gjerstad and Vernon Smith see other parallels between the Great Depression and the Great Recession ("Monetary Policy, Credit Extension, and Housing Bubbles: 2008 and 1929," Critical Review, 21(2-3), 269-300). They document how housing bubbles formed in both 1929 and 2008 based on expansion of housing and mortgage financing for the least qualified borrowers. They describe the boom and bust cycle.
The massive bubble in housing prices(driven by self-reinforcing price expectations) and the supporting expansion of credit, undisciplined by traditional equity requirements, as well as tiered internal structure of the housing market, had all depended on further unsustainable housing-price growth, premised on unfathomable easy mortgage credit--fueled by easy money. Once that momentum turned negative, buyers of homes, mortgages, and bank obligations reined in their activity, the stock market plummeted, and monetary policy was impotent to stem the collapse. Monetary policy was "pushing on a string" that only absent buyers could have pulled.Traditional policy tools, fiscal policy, monetary policy and regulation seem limited and ineffectual at best and counterproductive at worst. It is the actions of economic agents working through markets that will end the recession.