Daniel Gross makes the case that I’ve been making for weeks, supplying hard numbers where I’ve relied on common sense, that the current mess isn’t comparable to the Great Depression:
Both got going when financial crisis led to a reduction in consumer demand. But the two phenomena differ substantially. Instead of workers with 5 o’clock shadows asking, “Brother, can you spare a dime?” we have clean-shaven financial-services executives asking congressmen if they can spare $100 billion. More substantively, the economic trauma the nation suffered in the 1930s makes today’s woes look like a flesh wound.
“By the afternoon of March 3, scarcely a bank in the country was open to do business,” FDR said in his March 12, 1933, fireside chat (now available on a very cool podcast at the Federal Deposit Insurance Corp.’s Web site). In 1933, some 4,000 commercial banks failed, causing depositors to take huge losses. (There was no FDIC back then.) The recession that started in August 1929 lasted for a grinding 43 months, during which unemployment soared to 25 percent and national income was cut in half. By contrast, through mid-November 2008, only 19 banks had failed. The Federal Reserve last week said it expects unemployment to top out at 7.6 percent in 2009. Economists surveyed by the Philadelphia Federal Reserve Bank believe the recession, which started in April 2008, will be over by next summer. (Of course, back in January the same guys forecast that the economy would grow nicely in 2008 and 2009.) But don’t take it from me. Take it from this year’s Nobel laureate in economics. “The world economy is not in depression,” Paul Krugman writes in his just-reissued book The Return of Depression Economics. “It probably won’t fall into depression, despite the magnitude of the current crisis (although I wish I was completely sure about that).”
Krugman, though, says there’s a very important parallel: “the collapse of policy certainties. In particular, the Fed’s sudden impotence — its inability to cut rates any more, because they’re essentially zero — is a very real parallel with the Depression, and necessitates drastic responses.”
We no doubt have a systemic crisis unlike any we’ve seen in my lifetime and need massive reform to bring the rules of the game — which were written in 1944 — into alignment with modern realities.
At the same time, though, the macroeconomy is in better shape than it was in the 1970s. Recall Jimmy Carter’s “Misery Index,” which was obtained by adding unemployment and inflation. It stood at 13.57% in the summer of 1976 and had climbed to 21.98% by the time Carter was running for re-election in the summer of 1980. It’s currently at 11.3%. (I’ve often seen the Index include the prime interest rate. We’re in even better shape, comparatively, if we do that.)
This isn’t to say we shouldn’t be concerned, much less that we shouldn’t make policy responses. But we shouldn’t panic, either.
UPDATE (Dave Schuler)
This piece caught my eye this morning, too, but I’m afraid it elicited a somewhat less temperate response from me than it did from James. Much of my reactions were due to a train of thought somewhat along these lines:
We no doubt have a systemic crisis unlike any we’ve seen in my lifetime and need massive reform to bring the rules of the game — which were written in 1944 — into alignment with modern realities.
and which our colleague, Steve Verdon, might well second. Where is the moral hazard? What possible disincentives can be provided when the incentives for malfeasance are so high? When you have a personal fortune in the tens or hundreds of billions what does a fine in the millions mean? Social stigma is almost absent as a motivator in our society—as long as you’ve got money people will fawn over you no matter how you got it.
Arnold Kling has suggested increased criminalization of malfeasance in the financial sector:
I look at this crisis as a mountain of regulatory arbitrage. The brightest financial minds focused on ways to pile risks onto banks without regulators being able to see it.
If we are going to have a regulated, guaranteed financial sector (such as banks with insured deposits), then that sort of behavior needs to be criminalized. I would suggest creating a statute that makes conspiracy to mislead bank regulators a crime punishable be long imprisonment. Define the terms in the statute in such a way so as to make prosecution easy—don’t create standards of proof so difficult that a good lawyer can get a guilty defendant off. Such a statute would really, really, raise the risk of setting up schemes to privatize profits while socializing losses.
Again, when the prospective rewards are no enormous would the highly unlikely threat of detection, prosecution, and brief incarceration really be a deterrent?
More thoughts at The Glittering Eye.
