Why The Recession Persists

See Herbert Hoover didn’t cut spending by Russ Roberts at "Cafe Hayek." There has been a debate between Keynesians and Austrian economists on what causes recessions that Roberts goes into. The idea seems to be that if we produce too much of a product, like housing, eventually workers in that industry get laid off and production falls. The market is supposed to correct for this as workers move into other industries. But unemployment is still high. Here is what Roberts has to say about this and how it relates to what is going on now:

"When there is excess supply of something, its price usually falls. And the price of housing has fallen since the peak. But it hasn’t fallen enough, probably, because the government has been very eager to stop the price of housing from falling. Interest rates have been kept close to zero and the government has worked very hard to keep the flow of credit going by nationalizing Fannie and Freddie and keeping them in business to provide liquidity to the housing market. That in turn has made sure that the excess supply of houses is not mopped up by eager buyers. And that means that new housing starts are going to be anemic. And that means that unemployed carpenters and electricians will remain unemployed. Some have been tempted to find a new occupation. Others are going to wait, hoping the housing market will recover. It should have recovered or at least be on the path to recovery but the government has stymied the adjustment process."