An old paper from Lee E. Ohanian. Since most of you won't read it, I'll give a simple walk-through.

The theory/models
The Recession in the US over the course of 2007-8 was significant because lower output/income seems to have come almost exclusively from a drop in labour input, whereas most other recessions (and the '08 Recession in other countries) are to do with falls in productivity. I can't copy the graph used in the paper, but it shows an uncharacteristically large drop in hours worked per capita. According to Ohanian, current models which incorporate financial distress are not yet good enough to account for such a large deviation.

And there is evidence that what occurred in the US was different from other high-income countries. The fall in output and consumption (averaged across Canada, France, Germany, Italy, Japan and the United Kingdom) is 8.5pc, similar to the US's 7.2pc, and 4.8pc, similar to the US's 5.4pc respectively. But the average per capita employment decline from 2007Q4 to 2009Q3 in those high income countries is just 2pc, to the US's 6.7pc. So there's obviously something interesting happening in the American labour market.

Using a fairly standard neoclassical business cycle model; there is a production function which models inputs and outputs, a household time allocation decision between market time and leisure and a consumption/investment allocation decision. However, when we plug the actual data into the model we will see deviations; output will not be where the production function means it ought to be. The deviations we will see will offer a diagnostic basis with which we can examine the causes of the Recession.

The hours worked during the 2007-8 Recession in the US are much too low relative to the marginal product of labour, meaning something in the economy is acting like a tax on labour and depressing the incentive to work, and it appears this wedge in labour is the biggest factor. The choice that households make to work over leisure time (that is, the marginal rate of substitution between consumption and leisure) should be equal to the marginal product of labour. The average deviation for a post-WWII recession is 2.4pc (meaning the marginal product is exceeding the marginal rate of substitution), whereas the deviation in 2007-8 is 12.9pc. The average labour deviation for other high income countries was just 0.9pc.

There was almost no capital deviation in the US or other high-income countries (at just +0.3pc and +0.1pc respectively). However, there is a significant productivity deviation for non-US countries at no less than 6pc individually, and an average of 7.1pc. There is, however, almost no productivity decline in the US, different from previous post-war recessions like 73-74 and 81-82, which showed decreases in TFP or real output per hour. According to Ohanian, also, the labour market deviation can account for virtually all of the 2007-9 downturn. This is also similar, in some respects, to the Great Depression, which also had an incredibly significant labour deviation.

Explaining the Recession
Ohanian notes that the primary narrative of the Great Recession is the "financial explanation", which states that around mid-2008 the Recession significantly worsened as some asset-backed securities began to decline in value and sub-prime mortgages began to turn toxic, putting stress on the financial system. However, the idea that the financial system (or the capital market) could cause such massive fluctuations in economic well-being is challenged by the idea that in both US and non-US economies the capital deviation was incredibly minor. And, according to Ohanian, it doesn't explain the labour deviation.

Ohanian goes on to note how issues in the financial system aren't necessarily correlated with economic downturn. The 40pc declination in banks between 1929-1933 were mostly the result of mergers and small bank failures, meaning very little disintermediation. He also challenges Milton Friedman's hypothesis of the Great Depression--which is essentially the idea that money contracted too much--by showing how industrial hours worked had declined by 29pc between Jan. 1929 and Oct. 1930.

So instead Ohanian offers a policy-driven explanation, claiming that the 2008 tax rebate, TARP, ARRA, Cash for Clunkers and other policies contributed significantly. Through their design, these policies distorted incentives and led to uncertainty about the underlying shape of the economy. For example, the effect of US Treasury mortgage modifications was to impose a de facto income tax rate of over 100pc on some households, and interest rate spreads as well as domestic and foreign stock prices deteriorated much more quickly following the announcement of TARP than they did at the failure of Lehman Brothers.

However, more research is needed into the labour deviation of 2007-9 to explain just why it occurred. It is thought that the labour deviation of the 1930s occurred because of cartelisation and unionisation policies pushed by Hoover and Roosevelt which raised wages above competitive levels and reduced employment.

In conclusion/TL;DR
Neoclassical economics points to a disequilibrium in the labour market in order to explain the severity of both the Depression and the Recession. Significant labour deviations during 2007-9 only seem to be a function of the US economy, as other high-income countries saw significant productivity deviations but little labour deviation.

The current trend of shifting blame from the market to policy decisions feels akin to whitewashing.

A lot of the policies being blamed in this paper were a direct response to the financial crisis

Which was itself primarily caused by meddling asset requirements, dubious underwriting practices pioneered by Fannie Mae and Freddie Mac and was worsened by poor capital requirements and a tight monetary regime.

YAAAAAAAAAAAWWWWWWWNNNNNNNN

u wanna go nite nite nigguh?