October 29, 2014
The Washington Post repeats the silly myth that we were in danger of a second Great Depression without heroic measures to save Wall Street. A piece on the path of quantitative easing (which was a good idea) told readers:
“But while economists generally agreed that effort [the Fed’s purchase of $500 billion in mortgage backed securities in 2008-2009] helped the country avert another depression, the swift recovery that has historically accompanied downturns remained elusive.”
It is quite fashionable among Washington elite types to insist that we would have had another depression if we didn’t save the Wall Street banks, but do any of them have any idea what they mean by this?
The first Great Depression was the result of not having enough demand in the economy. We got out of it finally in 1941 by spending lots of money. The motivation for spending lots of money was fighting World War II, but the key point was spending the money. It might have been difficult politically to justify the spending necessary to restore the economy to full employment without the war, but that is a political problem not an economic problem. We do know how to spend money.
In effect, the pundits who say that we would have had a depression if we did not bail out the banks are saying that our economic policy is so dominated by flat-earth types that we would have to endure a decade or more of double-digit unemployment, with the incredible amount of suffering it would cause, because the flat-earthers would not allow the spending necessary to restore full employment.
That characterization of our political process could be accurate, but it is important to be clear what is being said. The claim is not that anything about the financial crisis itself would have caused a depression. The claim is rather that Washington economic policy is totally controlled by people without a clue about economics. Apparently, the Post and others adhere to this view.
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