It should be fairly straightforward to understand why an AD shock can cause a financial crisis. An underperforming economy means underperforming assets and if it's all a surprise to people that can lead to a financial crisis, particularly if there are major systemic linkages.
I'm a little confused about why certain usual suspets are so sure the chicken came before the egg in this case (or is it that the egg came before the chicken?).
Why is it so hard to imagine a financial crisis causing an AD shock? Securitization, bad models, and poor risk rating plus a "this time is different" mentality cause a financial crisis. We get these things in laboratories without AD shocks, after all. Systemic connections lead to tight credit and balance sheet problems generally and now you have an AD problem.
I'm no financial economist, but the problems with mortgage securitization and credit rating seem pretty well documented to me independent of any AD problem. But of course we don't have to choose - if we think both stories are reasonable then obviously we also believe in the potential for feedback loops.
What I can't figure out is why some people seem to think the financial crisis to AD channel is so objectionable.
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