The myth that Obama saved us from the great depression

Discussion in 'Politics' started by Max E., Apr 29, 2012.

  1. Max E.

    Max E.

    Great Article!

    The 'second Great Depression' saviour myth

    We're told that Fed officials and the Obama administration saved us from another 1930s-style slump. Nonsense

    As President Obama's re-election campaign heats up, there are several new accounts of his track record finding their way into print. One item for which he is – undeservedly – given credit is saving the country from a second Great Depression. The political elites believe in the salvation from the second Great Depression myth with the same fervency as little kids believe in Santa Claus. And it has just as much grounding in reality.

    While the Obama administration, working alongside Ben Bernanke at the Fed, deserves credit for preventing a financial meltdown, a second great depression was never in the cards. The first Great Depression was brought about not only from misguided policies at the onset of the financial crisis, but also from an inadequate policy response.

    The spending associated with second world war ultimately got us out of the Depression. There is nothing magical about spending on war; spending of the same magnitude on road, schools, hospitals or anything else also would have lifted the economy out of the depression at any point after the initial collapse in 1929-30.

    The problem was the lack of the political will to spend in these areas, whereas there was plenty of political support for fighting the war after the attack at Pearl Harbor. The lesson from this period is that the United States could have gotten out of the Great Depression any time it was prepared to spend the money to do so. This means that a financial meltdown could not possibly have condemned us to a decade of double-digit unemployment, since that would require a decade of ongoing policy failures after the original collapse.

    All this should be obvious to anyone familiar with the history of the Depression. But we don't have to go back 70 years for lessons on recovering from financial crises; we just have to look to the south. In December of 2001, Argentina broke the link between its currency and the dollar, and defaulted on its debt. The result was a financial meltdown that was certainly at least as severe as the worst-case scenarios that the United States might have faced in the dire days following the collapse of Lehman Brothers.

    Following this default, Argentina's economy went into a free fall for roughly three months. Banks were insolvent, families and businesses could not get access to their savings, and normal business dealing became almost impossible.

    However, by the second quarter of 2002, the government had largely pasted things together, to the point that the economy had stabilized. It began growing rapidly in the third quarter of the 2002, and continued to grow rapidly until the world recession slowed the economy in 2008. By the middle of 2003, it had recovered all the ground it had lost in the initial crisis following the default.

    Based on the experience of Argentina, we can say that in the case of a full meltdown, we might have seen three months of freefall (even worse than we actually experienced from September of 2008 to April of 2009), followed by three months of stability and then a return to growth six months out. Of course, it's possible that our policy crew of Ben Bernanke, Larry Summers and Timothy Geithner may not be as competent as the team in Argentina, but even if we double the time periods, we get six months of freefall and three years to get back to pre-crisis levels of output. That's bad news for sure, but quite a bit short of anything that could merit the title of a "great depression".

    The attack on the second great depression myth is not simply an exercise in semantics. The Obama administration and the political establishment more generally want the public to be grateful that we managed to avoid a second great depression. People should realize that this claim is analogous to boasting that we've kept our kids safe from being attacked by tigers. It's true that almost no kids in the United States are ever attacked by tigers, but we don't, typically, give out too much political praise for this fact – since there is no reason to expect our kids to be attacked by tigers.

    In the same vein, we are all supposed to be very happy we aren't in the middle of a second great depression – except there was never any good reason for us to fear a second great depression.

    What we most had to fear was a prolonged period of weak growth and high unemployment. Unfortunately, this is exactly what we got. The only question is how long it will drag on.

  2. achilles28


    I think we're headed for something over a 25% contraction. This puts us well within Great D levels, imo. Back in the 1930's, the downturn lasted so long because the Federal Reserve hoarded gold instead of loaning it out to commercial banks, to repump the money supply. Many economic historians, including Bernacke, have admitted as much. Obama inherited a structurally deficient economy that's ran on debt since the 80's. Technically, it's not his fault. And technically, by running massive deficits, he has in fact bought us time. However, it's really a semantical mindgame. The larger the debt bubble (government, consumer and derivative), the worse the dollar will implode when it finally does. Obama has done nothing to remedy the problem (offshoring, high taxes, excessive regulation), and domestically, made the situation much worse. I suppose it's all academic now. There's really no hope for us. We're on the Titanic and half the lifeboats have been launched. I'm real optimistic. I know. On the flip side, that volatility we talked about is gonna be coming back real soon. Tsunami like volatility :D Except I'm pretty sure some form of capital controls will be in place by then, and I will bet the sitting President blames speculators for the looming dollar collapse (instead of the national debt and federal reserve monetizing it). They'll need a scapegoat and we're it. Nobody likes a war-profiteer. I am getting ready now.
  3. I sympathize with the message but the description of what got us out of the great depression is pure nonsense.
  4. Max E.

    Max E.

    I didnt agree much with that part, i think what the article was getting at was that back then there was no desire by government to spend a bunch of money it didnt have where as today the government is so bloated, and and we simply dont have the willpower to cut and based on that, there was never any risk of us going into a depression.

    The real depression will be coming when we have no other choice but austerity, which is precisely the path Obama is taking us down.

  5. Max E.

    Max E.

    I agree, the real depression is coming when there is forced austerity, right now politicians are such pigs that there was never any risk of that, look at how hard they fought over the debt ceiling just to cut a couple hundred billion a year from the budget many years out, and they are already reneging on that.

  6. achilles28


    Yup. That's why I think this is all trending towards a dollar collapse. The debt gets run-up past 130-140%, foreign investors dump, and the Fed makes up the difference. At that point, the dollar collapses and we get an inflationary depression, not a deflationary one. In terms of employment and living standards, not much difference. Reserve status (and the loss of that premium), makes it that much worse.
  7. kinda hard to have an economic depression with a fiat currency.
  8. Brass


    You can tell just by the cartoons that Max was going for fair & balanced.
  9. That's Max for ya. That's most libertarians for ya, actually. They have been overrun by the wingnut conservatives and are hiding there now.
  10. Ricter


    Max has kinda bitch-slapped himself with this post. The alt, phoenix, caught it.
    #10     Apr 30, 2012