Capital Markets

No Depression?


It's becoming increasingly clear that the battle of ideas over all things related to our newly certified recession and $8.5 trillion (so far) bailout is boiling down to a fascinating revisionist face-off over the Great Depression: its causes, its effects, its solutions. Are we indeed in, or headed toward, the worst economic crisis since the Great Depression, and if so what lessons apply? A Greek-tragedy twist on all this is that Fed Chair Ben Bernanke is an economic historian who specialized in…the Great Depression! As such, his thoughts on the analogy are both fascinating and crucial. Here's what he said yesterday:

"Well, you hear a lot of loose talk, but let me just … say, as a scholar of the Great Depression -- and I've written books about the Depression and been very interested in this since I was in graduate school, there's no comparison," Bernanke said in a question period after an address in Austin, Texas.

Bernanke cited "an order-of-magnitude difference" in the current situation compared to the 1930s.

"During the 1930s, there was a worldwide depression that lasted for about 12 years and was only ended by a world war," he said.

"During that time, the unemployment rate went to 25 percent, at least, based on the data that we have. The real GDP (gross domestic product) fell by one-third. About a third of all of the banks failed. The stock market fell 90 percent." […]

Still, the Fed chief said lessons learned from the Depression may still apply today, including the "excessively tight monetary policy" that led to higher interest rates and deflation of about 10 percent a year over the first three years of the 1930s.

"We have learned from that experience that monetary policy has got to be proactive and supportive of the economy in a situation of difficult financial conditions," he said.

"The other part was -- the other error, the big mistake that policymakers made in the early '30s was they essentially allowed the financial system to collapse and they didn't do anything about it. The Federal Reserve did no action as the banks failed by the hundreds and the thousands."

More here, including a section about President Bush that seems to contradict Bernanke's this-ain't-the-'30s view:

President George W. Bush said in an interview released Monday that Bernanke and Treasury Secretary Henry Paulson warned him weeks ago that bold action was needed to avert a new Great Depression.

"I can remember sitting in the Roosevelt Room with Hank Paulson and Ben Bernanke and others, and they said to me that if we don't act boldly, Mr. President, we could be in a depression greater than the Great Depression," Bush told ABC News.

What has reason been writing on the Great Depression for the past 40 years?

* In January 2004, Julian Sanchez conducted a brief interview with Jim Powell, author of FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression.

* Four years later, Nick Gillespie interviewed The Forgotten Man author Amity Shlaes.

* In October 2004, Damon Root looked at "How FDR made life worse for African Americans."

* In June of this year, we polled seven market-friendly economic observers, all of whom (unlike me!) pronounced that we were either in or entering recession.

* At the height of bailout panic, we sampled another batch of libertarian economists about what they thought.

* And in a wonderfully prescient November 2006 piece, Brian Doherty discussed among five economic analysts (including Milton Friedman and Ron Paul) whether we can bank on the Federal Reserve, and specifically what they thought of Ben Bernanke's analyses of the Great Depression.