U.S. President Barack Obama wipes his face as he speaks at a campaign event at Iowa State University in Ames, Iowa, August 28, 2012.  Larry Downing / Reuters

Republican vice-presidential candidate Paul Ryan in Dover. (Brian Snyder / Courtesy Reuters)

Menzie D. Chinn

In "The True Lessons of the Recession" (May/June 2012), Raghuram Rajan sketches a structuralist interpretation of the Great Recession's causes and aftermath and draws out the resulting policy implications. Although he gets much right about the causes of the crisis, the reforms he recommends for ending it are misguided. In an environment of insufficient demand, a strategy that relies solely on getting rid of regulations, investing in human capital, and spurring entrepreneurship is doomed to end in sorrow. These types of policies are better thought of as complements to, rather than substitutes for, aggressive tactics aimed at boosting demand.

As Rajan admits, the crisis was caused by a confluence of forces, most important among them an ill-conceived frenzy of financial deregulation. This deregulation swept away existing checks on banks and gave rise

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