The myth of the “Second Great Depression”

It’s received wisdom that the alternative to the bank bailout of 2008 was “the Second Great Depression.”

But is that true?

Here’s Dean Baker, who actually walks through the logic, the economics, and the politics. His conclusion may surprise you, as well as the way he gets there. Baker starts (my emphasis and some reparagraphing throughout):

All knowledgeable DC types know that the TARP and Fed bailout of Wall Street banks five years ago saved us from a second Great Depression. Like most things known by knowledgeable Washington types, this is not true.

Let’s see why he says so:

bank-failureJust to remind folks, the Wall Street banks were on life support at that time. Bear Stearns, one of the five major investment banks, would have collapsed in March of 2008 if the Fed had not been able to arrange a rescue by offering guarantees on almost $30 billion in assets to J.P. Morgan. Fannie Mae and Freddie Mac both went belly up in September. The next week Lehman, another of the five major investment banks did go under. AIG, the country’s largest insurer was about to follow suit when the Fed and Treasury jury-rigged a rescue.

Without massive government assistance, it was a virtual certainty that the remaining three investment banks, Goldman Sachs, Morgan Stanley, and Merrill Lynch, were toast. Bank of America and Citigroup also were headed rapidly for the dustbin of history. It is certainly possible, if not likely, that the other two giant banks, Wells Fargo and J.P. Morgan, would have been sucked down in the maelstrom.

In short, if we allowed the magic of the market to do its work, we would have seen an end to Wall Street as we know it. The major banks would be in receivership. Instead of proferring economic advice to the president, the top executives of these banks would be left walking the streets and dodging indictments and lawsuits.

So the first question is — With these banks in receivership, would that have triggered a “second Great Depression”?

This was when they turned socialist on us. We got the TARP and infinite money and guarantees from the Fed, FDIC, and Treasury to keep the Wall Street crew in their expensive suits.

All the politicians told us how painful it was for them to hand out this money to the wealthy, but the alternative was a Second Great Depression. It’s not clear what these people think they mean, but let’s work it through. Suppose that we did see a full meltdown.

You’ll have to read the rest for the meaning and consequences of “a full meltdown” — but the bottom line is, it doesn’t mean what you think it means. Economically what would have happened is an FDIC bank takeover, several of them. But note:

The FDIC takes banks over all the time. This would be more roadkill than it was accustomed to, but there is little reason to think that after a few days most of us would not be able to get to most of the money in our accounts and carry through normal transactions.

In other words, no Second Great Depression. But the piece doesn’t end there. We got the result we got for another reason, and it’s not the economic outcome:

But suppose we hadn’t opened the government’s wallet and instead let the banks drown in their own greed. Would we have faced a decade of double digit unemployment?

In fact, the crime of deregulation caused the crisis, but didn’t cause the bailout. The true cause is, well, blackmail — hostage-threatening — on the part of some of the players. Baker sees the list of players as these fine folks:

1. People “who would like the government to spend enough to restore full employment, but argue the political opposition would be too great”

2. People “who don’t like government spending and would oppose efforts to boost the economy back to full employment”

3. “Washington Very Serious People types … who would go along with restarting the economy but only if accompanied by sharp cuts to programs like Social Security and Medicare”

Baker treats each group differently, but is very clear. Ultimately, the story is one of political blackmail; it’s not a story of necessity created by economics.

Very nice. Again, do read. The myth of the “Second Great Depression” deserves to die. Given that the event is likely to replay, we need to be more clear-headed the next time. Want to be blackmailed a second time? Neither does the rest of the country. Neither does all of the rest of the country.

Coalition time? I would think so.

GP

To follow or send links: @Gaius_Publius


Gaius Publius is a professional writer living on the West Coast of the United States.

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