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.


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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15 Responses to “The myth of the “Second Great Depression””

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  3. Bill_Perdue says:

    My opinion is that Paul Krugman is right, this is more like the Long Depression than the Great Depression. It was caused largely by Clintons signature on the deregulation bills of 1999 and 2000. The bailout, in addition to TARP, included an additional $7.7 Trillion dollars from incidents of Quantitative Easing. “Fed Chairman Ben Bernanke had argued back in 2008 when the crisis hit that revealing borrower details would create a stigma that would have led to more banks collapsing. And the Fed fought to keep the details of the loans, which totaled $7.77 trillion, secret long after.”

    Here’s another way of depicting the money $770,000,000,000,000.00.

    “In September 1873, Jay Cooke & Company, a major US bank with big investments in railroads, went bankrupt. The Jay Cooke failure triggered a US panic that brought down 98 banks, 89 railroad companies, and 18,000 other businesses. By 1876, one in seven Americans was out of work. … The Long Depression was ended, like the Great Depression, by military expenditure. The Long Depression started the countdown to the First World War.” –

    The unparalleled warmongering of the last three American regimes is a recognition of their desire to oil the economy with the blood of Arabs and mulsims.

  4. bhull says:

    One key difference between 2008 and 1929 was the trillions in institutional retirement funds like CALPERS, the federal retirement system,etc, as these 600 pound gorillas were deeply invested into CDOs and CMOs as well as muni bonds, muni bonds supported by the property taxes collected on the value of homes that would have cratered. The FDIC at the time was funded only to the tune of $50 billion and the financial institution exposure alone (not counting at that time the brokerage houses like Goldman that were not covered by FDIC) was in the trillions. The institutional retirement funds would have collapsed overnight (yes all those relying on a federal retirement/pension check would have seen their funds balance go poof) if the swaps supported by AIG and others were taken away and all the CDOs and CMOs were shown to have no clothes and no value. It all should have happened.

  5. Peter says:

    They are after all the “makers” the rest of us lot are only “takers”.

    Such a ludicrous thought.

  6. BeccaM says:

    The obscenely rich are becoming richer by the day, as everybody else loses ground and becomes poorer. As far as they’re concerned, the ‘system’ is working perfectly.

  7. pappyvet says:

    The object was no to save the country but to save the practices.

  8. karmanot says:

    Nothing has changed. The Market is boiling at 15,000 + and nobody seems to be batting an eye.

  9. BeccaM says:

    The problem as ever is they constantly couch their arguments as “Choice A or B, no other alternatives.”

    As you pointed out, Gaius, there were far more alternatives than simply shoveling money at the banksters who were on the verge of destroying the entire world economy. Starting with “Let’s stop them from doing what they were doing.”

    But no, the plutocrats won the day, and they’re already anxious to have another run at it.

  10. Dan Hart says:

    We decided to become socialist. Only problem is, we decided bailouts and looking after each other is only good for the rich. The rest don’t even need food stamps, apparently.

  11. ronbo says:

    Just a slight change, It’s THE great Labor Depression. If you are wealthy, you are back to rolling in the big bucks; all others are seeing their income decline significantly and their costs increasing. The middle-class is melting into impoverishment.

  12. Indigo says:

    But here we are, mired in the Second Great Depression. A decade of war has not pulled us out, the profiteers appear anxious to find a way to keep the scam running, and there’s no rational politico in sight. We’re likely to see another decade of this but at least we’ve learned that Harvard lawyers are not the answer, not even when graced with a beautiful wife.

  13. gratuitous says:

    And probably the worst part of a very bad experience was pointed out in another context just last night by President Obama: Thinking they got away with it, the perpetrators are likely to do the same thing again. Why shouldn’t the banksters be confident that the public can be stampeded into another panicked bailout? Or gulled into thinking that there’s just no alternative, and if you oppose another bailout, you obviously want society to degenerate into savagery and cannibalism?

    We didn’t put any strings on the money, didn’t enact any substantial new regulation (or re-regulation) of the finance industry, and sure as the world didn’t prosecute any of the big boys who had their hands on the levers. But it’s poor people who need to knuckle down, buckle down, tighten their belts another notch, and adopt Boxer’s credo from Animal Farm: I will work harder!

  14. Just_AC says:

    As you and I have talked about Gaius, there was also the great gimmick that the Federal Reserve did in October of 2008, deciding to pay banks, both domestic and foreign, interest on the excess reserves they deposited with the Federal reserve, thus removing available funds from the public to get loans on. So, “We’ll give you money, you give it back and we will pay you interest” – I’d do that all day long! Go to Wikipedia and search for Excess Reserves and be shocked at the graph. From 8 Billion to 830 Billion in three months and now it is around two trillion dollars.

  15. heimaey says:

    At the time, I thought the bailout was the answer because I was scared there’d be a second great depression. I, and many others, were fooled. We should have let them go down. Still not sure if all of the proper people would have paid the price or not, but more would have certainly (well, any really). I feel like a sucker now.

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