As is quickly becoming usual, Tina at Diotima’s Ladder asks excellent questions: Roosevelt and Obama: Did we avoid a Great Depression? | Diotima’s Ladder.
For the past week I’ve been rushing home every night to catch The Roosevelts: An Intimate History by Ken Burns. I’m not really a big Ken Burns fan. And yes, it’s the fiddle music. But this one is worth a watch. (And the music is not so incessant.)
The episode on the Great Depression made me wonder about our Not-So-Great Recession. We complained bitterly about our losses during that time, but seeing those lines of people winding down the street just to get a free lunch makes me think we might be a little ungrateful for what we do have.
Her entire post is well worth reading, but I’m interested in this question that she asks at the end.
My question to you is this: Did we avoid a Great Depression? What can history teach us?
I’d love to hear your thoughts.
I responded with this comment, which I’m reproducing here, slightly enhanced.
I don’t think there’s any question that we did avoid another Great Depression and, at least for the United States, it was the result of the Bush administration, the Obama administration, and the Federal Reserve system all acting properly, stepping up at the critical moments.
To see how bad it could have been, all we really have to do is look at the years 1929-1933. As far as I know, this was the worst economic contraction in US history. The government let banks fail by the thousands, they cut government spending repeatedly in a vain attempt to balance the budget, passed ruinous tariffs discouraging international trade, and the Federal Reserve contracted the money supply to meet its obligations under the then rigid international gold standard.
All of this killed spending throughout the economy, sending it into a tailspin. The nominal size of the economy collapsed by 40% and unemployment hit 25%. It’s fair to say that in early 1933, the economy was in free-fall and democracy was in jeopardy. The New Deal, starting in March 1933, stabilized things, alleviated suffering, and was able to provide a good amount of economic growth and lower unemployment, but there wasn’t a complete economic recovery until that huge stimulus package known as World War II kicked in.
In 2008-2009, when faced with a similar situation, and with the lessons of the Great Depression firmly in mind, the US government pretty much did the opposite. It stemmed the cascading failures before they got out of hand with the much reviled bailouts (Bush administration), passed the equally reviled stimulus package (Obama administration), and stuck to an expansionary monetary policy (Federal Reserve), driving libertarians crazy. These actions were far from perfect (the stimulus, for instance, probably should have been much larger), but on balance the performance of our government in this generation far surpassed the performance of the government in the early 30s.
Lamentably, this initial stabilization was followed by years of premature government austerity in both the US and in Europe, causing pointless suffering for millions. Fortunately, in the US, the Federal Reserve compensated somewhat with monetary policy, again to considerable revilement.
The problem, of course, is that it’s very difficult to demonstrate what could have happened. We can only see what did happen. In economic history, there are always conflating variables giving alternate narratives just enough oxygen to survive. But I think the Great Recession is, on balance, a demonstration that we can learn from history, even if most of us don’t recognize the win.
SelfAwarePatterns 
‘. . . it was the result of the Bush administration, the Obama administration, and the Federal Reserve system all acting properly.’
Only in so far as they sustained the existence of the corrupt institutions and associated practices, by means of shotgun takeovers, inequitable bail-outs and as much free money as was needed to rig the markets and create asset bubbles for those same institutions’ benefit. The trope ‘socialism for the rich, capitalism for the poor’ springs to mind once again. As for the people, it’s a case of ‘killing me softly’, so that I don’t (yet) notice.
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I’d agree that our institutions are plagued with corruption, but from the history I’ve read, I don’t see them as being uniquely corrupt in our time. It’s a definite fact that life is not always fair, and that, due to the way our civilization is structured, people who don’t deserve to be rescued often do get rescued, while those who are often more deserving are left to sink. I deplore this state of affairs.
That being said, a failure of the whole system is in no one’s interest. Again, all we have to do is look at 1929-1933 to see what happens when we let financial institutions fail en mass. The average person suffered terribly in those years, far more than the suffering since 2008. That’s not to downplay the suffering since 2008, only to say it could have been much worse.
For people who think we live in uniquely blinkered and corrupt times, I often recommend the movie “Mr. Smith Goes to Washington”, produced in 1939, a movie about the political corruption existing at the time, and that they look up 19th century institutions like Tammany Hall.
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There were alternatives SAP; no sane person was advocating allowing a failure of the whole system. Here’s just one such alternative from Paul Krugman:
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No argument from me on that. I’m a fan of Krugman and think he was probably right, although we should bear in mind that he had the luxury of being free of the political constraints the actual policy makers were mired in. I’m not saying what the government did was perfect, far from it, only that it was far better than what the government did in 1929-1933.
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‘. . . free of the political constraints the actual policy makers were mired in.’
Fair comment SAP, one which leads me to wonder what form of ‘constraints’ ex-CEO of Goldman Sachs and Treasury Secretary Henry Paulson was under when, as you say, ‘acting properly’ and whilst in the nation’s best interests at a time of crisis:
“The Goldman Sachs benefit from the AIG bailout was recently estimated as US$12.9 billion and GS was the largest recipient of the public funds from AIG. Creating the collateralized debt obligations (CDO’s) forming the basis of the current crisis was an active part of Goldman Sach’s business during Paulson’s tenure as CEO. Opponents argued that Paulson remained a Wall Street insider who maintained close friendships with higher-ups of the bailout beneficiaries. If passed into law as originally written, the proposed bill would have given the United States Treasury Secretary unprecedented powers over the economic and financial life of the U.S. Section 8 of Paulson’s original plan stated: ‘Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.’ Some time after the passage of a rewritten bill, the press reported that the Treasury was now proposing to use these funds ($700 billion) in ways other than what was originally intended in the bill.” [Source: Wikipedia]
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