There are several different explanations for the current recession. Some say the market is inherently unstable, some blame deregulation, and others blame the Federal Reserve. How are we supposed to know whom to believe?

Well, the first thing I’d look at is who saw it coming. The deregulations many blame for causing the housing crash happened more than a decade ago. The people who blame deregulation had plenty of time in between the actual deregulations and the crash of the housing bubble to sound the alarm about the coming crash. But they didn’t—those who now are sure that deregulation caused the recession didn’t know about the housing bubble until after it had popped. They explain this away by saying that no one saw the crash coming.

One school of economics, the free market leaning Austrian school, did predict the recession. Austrian economists were saying as early as 2002 that the Federal Reserve was creating a housing bubble, and that if they didn’t stop, it would get bigger and bigger until it finally bursts, which is exactly what happened. (A list of these correct predictions can be found here: lewrockwell.com/block/block168.html.) They were ignored by most of the economics profession and the government, including Alan Greenspan, Ben Bernanke and the rest of the people currently running the economy.

So what do the Austrians say caused the boom and bust? The key is the money supply and interest rates. The Federal Reserve, or similar institutions, print money out of thin air and give it to banks. This increase in the money supply spreads through the economy, causing inflation.

It does this because, since printing money doesn’t increase the amount of goods and services produced, there are more dollars chasing the same amount of goods. So, in effect, the government creates an “inflation tax,” essentially taxing most of the country to benefit the bankers—the banks get free money, everyone else gets higher prices.

The money creation also affects the interest rate. The extra money in the banks increases the supply of lendable funds. Like any other increase in supply, this decreases the price of loans (the interest rate).

If this increase in supply happened naturally, through increases in actual savings, this would be fine. If people are saving more, they’re delaying consumption. The market responds to the lower interest rate with an increase in production of longer term projects. That way, they can sell the final goods later, once consumers spend the money they’ve saved up.

The problem with money printing, aside from inflation, is that it artificially lowers the interest rate. Savings hasn’t actually increased, but the market responds as if it had. For example, in the past decade, the Fed’s printed money went into the housing market, creating a bubble. Because entrepreneurs didn’t see the true interest rate, resources were misallocated.

Labor and resources that could have been used to produce things people wanted were diverted to the housing market. The bubble couldn’t last because the increase in housing construction wasn’t based on actual savings. The interest rate told the market that savings had increased. If this had been true, it would mean that consumers really were delaying their consumption, and that there would be a demand for housing and other long term projects later. But it wasn’t true, so much of the labor and resources devoted to housing construction was wasted. Since people couldn’t actually afford the homes they were sold, many ended up defaulting on their loans. The market realized that the housing boom was completely unsustainable, and the bubble popped.

So who cares what caused the recession? Why does it matter? It matters because if we know what caused it, we know what policies will or won’t be able to fix the economy. For example, since deregulation didn’t cause the recession, more regulation won’t prevent the next one.

Since Federal Reserve money printing caused this recession, more money printing (what they call “Quantitative Easing”) isn’t going to fix it, and will just end up making the problem worse later. Trying to prop the housing market back up will only make things worse, because the boom was unsustainable. Propping it up again only restores an unsustainable bubble that will inevitably pop.

Resources being misallocated into the housing market caused the problem, and the only way for the economy to become healthy again is for resources to be re-allocated to sustainable and more efficient areas. Trying to keep the resources misallocated will only delay the recovery.

Michael Annes is a freshman majoring in mathematics.