The Blind Men and the Elephant

It is amazing how different people come up with different versions of reality. The classic tale is of blind men and the elephant.

Here's a bit from a blog posting by Brad DeLong replying to a comment by Alan Metzger that what we are going through is "no Great Depression". As DeLong points out, nobody is saying that today's Great Recession is in fact a depression. What people are saying is that it is the worst recession since the Great Depression and that it is like the Great Depression in that its causes are a credit collapse and not a financial squeeze caused by the Federal Reserve tightening interest rates:

He [Allan Meltzer] says that based on what we know now, this recession is on a par with those of 1973-75 and 1981-82, and does not justify the extraordinary policy interventions, including large, multi-year fiscal stimulus, that have been justified by invoking the specter of the Great Depression.

I disagree. The recessions of 1973-75 and 1981-82 differ crucially from 2007-2009 in that they were both induced, and ultimately ended, by monetary policy. The 1970s Fed may be remembered as a milquetoast, but the fact is that Arthur Burns raised the fed funds rate from 5% (using monthly averages) at the end of 1972 to 13% in 1974.... Paul Volcker took the Fed funds rate to 19% in July 1981, then dropped it to 9% by the following November.... In both cases, the economy responded to such a dramatic swing from tight to easy monetary policy as you’d expect—with a severe recession then a strong recovery.... By contrast, the severity of this recession results from the collapse of an asset and credit bubble for which monetary tightening, if it had any role, was merely a catalyst; at its peak in 2007, the real fed funds rate only reached 3%. It is now minus 1.5%, and can go no lower because the nominal funds rate is effectively at zero....

It’s possible that dropping the fed funds rate to zero and taking no further action may have been enough to turn the economy around. But that would have been a pretty big risk. When conventional monetary policy is out of ammunition, it is logical to look to aggressive, discretionary fiscal and unconventional monetary policies (such as intervening in credit markets and quantitative easing) to cut off the tail risk of a far worse slump. You can argue over whether these policies have been implemented in the most effective way possible, but the case for using them seems indisputable, which was not the case in previous post-war recessions.

I think the best argument to support Brad DeLong is a graph done by the Calculated Risk web site:

Click to Enlarge
As can be seen, this will soon be the largest job loss since WWII. The previous record was the 1948 recession as the economy re-adjusted from war to peace. The early post-WWII recession were deep and short. The more recent recessions were long and shallow with regard to job loss. This current recession is the worst of both worlds: deep and long.

Update 2009sep05: From The Big Picture blog, here is yet another graphic that makes the point that "this time it is different"...