The essence of the matter

Have you wondered why economists seem so divided over on their interpretations of the current economic crisis? Here is my attempt to boil it down.

Keynesians and Classicals (of various kinds) agree on one key point; there is currently a serious lack of confidence in the economy that is inhibiting private business investment expenditures. What sharply divides them are views as to what caused this crisis of confidence and what needs to be done to fix it.

Keynesians think that the market failed because of lack of regulation in a dynamic innovative environment. Those with Classical inclinations believe that exactly the opposite is true; that it was ill-conceived regulatory initiatives like the concerted push to expand home ownership in America, underwritten by FANNIE MAE and FREDDIE MAC, and facilitated by easy money, that caused a housing bubble and runaway financial asset expansion. The latter was seriously aggravated by a cartel of rating agencies indirectly created by government licensing requirements and operating with serious conflicts of interest.

Keynesians think that more government-Fed-financed stimulus is needed, and that higher taxes don't matter. Those who believe in the market believe that permanent significant tax reductions (comprehensive tax reform) and a commitment to fiscal responsibility at the various levels of government is what is needed. This will entail credibly limiting the power of the Fed as well.