I'm not in any real place to adjudicate this debate, but Paul Krugman notes something interesting about the light the current crisis sheds on the Great Depression. One of the arguments about the Depression is that it was, essentially, a failure of the central bank to pursue a sufficiently aggressive intervention. It was a failure of monetary policy. But in this crisis, the Federal Reserve, under the leadership of inflation-expert Ben Bernanke, has been extremely aggressive. And the crisis grinds on. The implications of this are that monetarists, the most prominent of which was Milton Friedman, reject the idea that the government should directly intervene in the economy. Rather, it should stand back and either expand or contract the money supply. It should restrict itself to monetary policy. Keynesians argue that monetary policy isn't enough because people can develop a liquidity preference, in which they prefer to hoard money and thus there is insufficient spending and thus insufficient demand. That's why the government needs to spend directly in order to induce demand. Simply making it easier for private actors to spend isn't sufficient if private actors have decided that the world is unstable and now is a time to hoard. What we're seeing right now is that the monetary efforts have proven insufficient. Most economists are now calling for a fiscal intervention, in which government spends directly to influence the economy. We'll see if that works, I guess.
