This October we will celebrate, if that is that right word for it, the 90th anniversary of the stock market crash from which many mark the start of the Great Depression of the 1930s which persisted despite strenuous efforts right up until World War II broke out, in the process changing our views about what the economy, politics, and government should do. It is one of the mileposts by which we reckon our history. There is before the Great Depression and after it.
There have probably been hundreds of books written trying to explain the depression, its causes, and why it persisted so long most completely forgettable but some, notably Keynes’s 1936 book Employment, Interest and Money, tremendously influential. We still don’t know and there are probably as many explanations as there are analysts, many of them, unsurprisingly, justifying views that the author held before engaging in his or her analysis.
I have little doubt that the same will be true of the Great Recession. Hundreds (at the very least) of books have already been written about it. This morning Robert Samuelson devotes his Washington Post column to commentary on the most recent salvo, by Ben S. Bernanke, Timothy F. Geithner and Henry M. Paulson Jr. Without reading it I feel confident in saying that it justifies all of their actions and blames every bad thing that happened on somebody else. Here’s a snippet from Mr. Samuelson’s commentary:
The book is a CliffsNotes for the crisis. The 129-page text provides a lucid chronology, followed by nearly 100 pages of charts and tables. The authors no doubt hope that their narrative buttresses their reputations. Still, most of their analysis rings true, with one glaring exception: their theory of what created the crisis.
Here’s one passage, “The story of how the crisis happened is . . . about risky leverage, runnable funding, shadow banking, rampant securitization, and outdated regulation.” A rough translation: Lenders lent too much, borrowers borrowed too much, and arcane financial instruments stymied regulators from stopping the process.
This is the conventional wisdom. It’s also wrong, because it mistakes the crisis’s consequences for its underlying cause. The cause lay in the delusional beliefs that the economy had changed so much that practices that in the past would have been considered risky were no longer so.
Everyone drank the Kool-Aid, so to speak. Economists argued that the business cycle had smoothed. They called this the Great Moderation. Recessions would be shorter and less severe than in the past. This seemed to be confirmed by the decade-long expansion in the 1990s, the longest in U.S. history.
Would it be too snide of me to suggest that the Great Recession itself and the long, phlegmatic recovery that followed shared a common cause, summarizable in four words? The Fed screwed up.
At the very least I think it is not unfair to blame the surge in the prices of financial instruments, e.g. the DJIA went from 11,000 to 26,000 today, on the Fed. That was the stated objective of the policy the Fed deployed to spur economic growth, blandly deemed “quantitative easing”. Translated: giving money to rich people in the hope that they would invest in the real economy. It has not succeeded, at least not in the domestic economy.
Whatever the causes of the Great Recession and the slowness of the recovery, very little has been done to change the system that was in place prior to 2008. Banks sustain even less risk than they did then, presumably in the hope that less risk will induce bankers to behave more responsibly.
My modest proposal is that there should be consequences for bad behavior. Consequences for managers, consequences for bankers, consequences for politicians, and consequences for Federal Reserve governors. It is only human for people to persist in their folly as long as they face no consequences for doing so. Managers, bankers, politicians, and Federal Reserve governors are far from philosopher-kings.