Can microeconomics explain the current crisis? Steven Horwitz explains how it does in an outstanding explication of microeconomic explanation and its application to our current macroeconomic problems (pdf):
The Austrian approach to macroeconomics can already be seen as being fundamentally microeconomic. What matters for growth is the degree to which microeconomic intertemporal coordination is achieved by producers using price signals, especially the interest rate, to coordinate their production plans with the preferences of consumers. However, this coordination process can be undermined through economy-wide events that might well be called “macroeconomic.” In particular, the very universality of money that makes possible the coordination that characterizes the market process can also be the source of severe discoordination. If there is something wrong with money, the fact that it touches everything in the economy will ensure that systemic “macroeconomic” problems will result. When money is in excess or deficient supply, interest rates lose their connection to people’s underlying time preferences and individual prices become less accurate reflectors of the underlying variables of tastes, technology, and resources. Monetary disequilibria undermine the communicative functions of prices and interest rates and hamper the learning processes that comprise the market.
The Austrian theory predicts that excess credit will flow to long-term production processes. In this case, that was housing, as the lower interest rates from the Fed’s expansion artificially reduce the price of housing and led to the sequence of events we have outlined. As noted in the prior section, the Austrian theory does not attempt to predict the specific path inflation will take, only that it will generally conform to the pattern whereby it ends up in long-term investments as a result of lower interest rates. That in this case it went into housing is a particular feature of this cycle that is completely consistent with the more typical features the theory identifies. Inflation by the government central bank, along with other government interventions and policies, account for both the typical and unique features of this cycle and are the direct causes of the current recession.
As I said, just outstanding. Read the whole thing.