The recession is due primarily to a widespread mismatch between current conditions and previous plans, relationships, and contracts. As a result, consumer desires, resources, and production technology are also misaligned. That misalignment has been greatly exacerbated by the collapse of financial intermediation. The best path for the government is to promote aggressive recognition of losses and a restructuring of the financial system. To the extent that the government becomes involved in restructuring financial institutions, it should avoid any unnecessary wealth transfers from taxpayers to the security holders of the financial institutions. Beyond that, the realignment process is best left largely to private agents. The government has neither the necessary information nor the proper incentives to do the job.
Cornell is known as a finance guy, and he cites Fischer Black as his main influence. Alex Tabarrok forwarded the link to me and said that I should have been cited, but of course my thoughts are derivative of Black's also. I am sure that the Austrians will want to jump in and claim some credit, for which they are entitled.
Cornell's article appears in The Economist's Voice, a legitimate peer-reviewed journal, started by Joseph Stiglitz and Brad DeLong. That doesn't make the Recalculation Model the winner over Keynesian macro, but having it in a journal does give it a certain level of legitimacy. Krugman cannot just sneer "hangover theory" and dismiss it out of hand.