Yikes

G.D. vs now

From Barry Eichengreen & Kevin H. O'Rourke (h/t: Andrew Sullivan)

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3 Responses to “Yikes”

  1. Ranjit Says:

    I couldn’t seem to get both the graph and text into that post, so here is the link to Eichengreen & O’Rourke’s article, “A Tale of Two Depressions”:

    http://www.voxeu.org/index.php?q=node/3421

    It’s actually an update of an April 6 piece, which was widely cited at the time. The facts on the ground haven’t changed much, alas. The output, stock market (!), and trade numbers lead the authors to a dismal conclusion: “today’s crisis is at least as bad as the Great Depression.”

    They do say the policy response to the crisis has been much better than in the Great Depression, but that implies that the shock to the economy has been even worse.

  2. Alex Says:

    Thanks for the reality snapshot. Man, is that sobering. Not that I wasn’t already stone cold, but now I have my grim face on again.

    And your suggested implication is the real question–has the policy response actually been better, and if so, does that mean underlying conditions are worse? Or do we just think the policy response is better? Perhaps we’re still not doing the right things. Neither one of those possibilities is heartening. I’m trying to think of a third or fourth that will make me feel better, but I have nothing.

    Do you think this just puts us in a wait-and-see mode? Continue the efforts and hope that we see those lines diverge with modernity heading in a positive direction (or at least leveling) and not following that horrific slide?

  3. Ranjit Says:

    I agree with the authors that the policy response has been better. Central banks in 1929-31 were obsessed with holding onto their gold reserves, which made them overly tolerant of high interest rates and deflation, and little inclined to take action. Whereas there’s no question that Ben Bernanke’s Federal Reserve has been extremely active in cutting interest rates, increasing bank reserves, and (gulp) throwing multiple lifelines to the banks. Ditto the federal government. Hoover and Congress famously fretted about the deficit and ended up raising taxes in 1932. This time, even Bush took steps that were quasi-Keynesian (tax rebate last spring, bank bailout last fall), and of course the current stimulus is classic Keynesian pump priming.

    I’m sure hindsight will find some flaws in certain aspects of the current policy response (bank bailout specifics in particular, maybe the automaker bailouts too), but it’s hard to imagine a worse policy response than that of 1929-32.

    A wait and see mode … Yes, that is the best counterpoint to the graph, whose comparison is just twelve months into each crisis. As of June 1930 (twelve months in), the real bad stuff, like the first wave of bank failures, hadn’t happened yet. Late 1930 is when it really started to hit the fan. I’m not sure why the authors start the current clock in April 2008 instead of the official recession start date of December 2007, but it’s still early, and policy responses like the bank bailout, the bank reserve creation, the low short-term interest rates, and especially the spending stimulus will take some time to start working. The nature of the beast.

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