The current credit crunch is totally predictable. In fact, any number of progressive economists have been predicting both the bust of the housing bubble and a deep recession to follow.

One of the best places to follow as-it-happens news on financial markets is the Center for Economic Policy Research especially the news briefs by Dean Baker.

A major part of the rationale for regulating the financial sector is that banks, left to their own devices, act in ways that make business cycles worse: the booms are larger, the busts are bigger. When times are good bankers get swept up in the optimism, so they make loans. Even loans that are not so smart. This feeds the boom. When the tide turns, as it always does, bankers stop making new loans, and often call otherwise sound loans. This pulls spending power out of the economy and pushes the economy into a recession (or worse).

Two cool vocabulary words: Pro-Cyclic Behavior (refers to institutions or individuals who act in ways that accentuate the boom/bust cycle of capitalist economies).
Counter-Cyclic Behavior (refers to institutions or individuals who act in ways that damp down, or moderate the boom/bust cycle of capitalist economies).

Keynsian contributions to economics include the tools governments need to act COUNTER-CYCLICALLY! And if one compares a graph of business cycles before 1940 and after 1945 one can really see the difference.

Stay tuned and I will be posting a chart that shows exactly what I’m talking about. (Visualize: before 1940 is like a patient’s ekg when they are having a heart attack — all sharp peaks, and sharp downturns, really zig-zag up and down. After 1945 the egk is much smoother, the waves of a healthy person’s heart while resting.)