August 26, 2013
Robert Samuelson repeats two common myths in his discussion of the battle over the successor to Ben Bernanke as Fed chair. He tells readers that the 2001 recession was mild by historical standards and that Bernanke might have prevented another Great Depression with his actions in 2008-2009.
While the length and severity of the official recession in 2001 would imply that it was mild, at the time it was the longest period without job growth since Great Depression. Arguably the Fed was up against the zero bound with its monetary policy as it reduced the federal funds rate to 1.0 percent for two years. While there was still room to go further since the rate was still above zero, most economists see little additional benefit from the drop from 1.0 percent to 0.0 percent. In fact, many economists have said that the European Central Bank was against the zero lower bound when it had lowered its overnight rate to 1.0 percent.
It’s difficult to see how anything Bernanke did or did not do in 2008-2009 could have condemned the country to another Great Depression, defined as a decade of double digit unemployment. The United States eventually got out of the last Great Depression through the massive spending associated with World War II. There is no economic reason that the United States cannot undertake the same sort of spending today.
If Bernanke had allowed a complete financial collapse (putting the Wall Street banks forever out of our misery), the government could have begun to pump up the economy the next day with a massive burst of spending. If there were political obstacles, these could have been overcome by telling people that spending on education, infrastructure, energy conservation and other areas was necessary to protect us from an invasion by Martians, as Paul Krugman has suggested.
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