DeLong Asks a Question

Here is a very good article by Brad DeLong asking a very good question: "What Would Have Happened If World Governments Had Washed Their Hands of the Financial Crisis?". Here's a key bit:

The Economic Policy Institute reports a poll showing that Americans overwhelmingly believe that the economic policies of the past year have greatly enriched the bankers of Midtown Manhattan and London’s Canary Wharf (they really aren’t concentrated on Wall Street or in the City of London anymore). In America, the Republican congressional caucus is just saying no:

• no to short-term deficit spending to put people to work,


• no to supporting the banking system,


• and no to increased government oversight or ownership of financial entities.

And the banks themselves are back to business-as-usual: anxious to block any financial-sector reform and trusting congressmen eager for campaign contributions to delay and disrupt the legislative process.

He then proceeds to answer the question posed in the title of the article:

The only point of reference is the Great Depression itself. That is the only time in more than a century when (a) a financial crisis caused a widespread, lengthy, and prolonged reinforcing chain of bank failures, and (b) the government by and large washed its hands--neither intervened on a large scale itself nor passed the baton to a consortium of private banks (usually, in the U.S., headed by Morgan) to support the system as a whole.

It is now 19 months after Bear Stearns failed and was taken over by JP MorganChase, with the assistance of up to $30 billion of Federal Reserve money on March 16, 2008. Industrial production now stands 14% below its peak in 2007.

By contrast, 19 months after the Bank of United States, with 450,000 depositors, failed on December 11, 1930 – the first major bank collapse in New York since the Knickerbocker Trust failure during the panic and depression of 1907 – industrial production, according to the Federal Reserve index, was 54% below its 1929 peak.

Opponents of recent economic policy rebel against the hypothesis that an absence of government intervention and support could produce an economic decline of that magnitude today. After all, modern economies are stable and stubborn things. Market systems are resilient webs that offer the best possible incentives to people to make deals and use resources productively. A 54% fall in industrial production between its 2007 peak and today is inconceivable – isn’t it?

Go read the article, it has lots of interesting points and gives you a very good perspective on the current crisis.