Friday, January 11, 2013

Tim Geithner and the myth of avoiding a second Great Depression

One of the arguments that Mr. Geithner likes to trot out to say the Obama Administration's policies worked is that the global economy was spared a second Great Depression.

Economic pundits tend to say you cannot disagree with this assertion because it is impossible to show what would have happened if these policies had not been followed.

Wait a second, but this argument has a couple of major assumptions that are actually false.

First, it assumes that there was something that the Obama Administration did that prevented the second Great Depression.  Perhaps I missed something, but there was a response to the first Great Depression that played a major role in how the global economy responded to the Great Recession and that by itself virtually eliminated the possibility of a second Great Depression.

Specifically, as a result of the first Great Depression, we have automatic economic stabilizing programs like unemployment benefits throughout the western economies.  In addition, we have programs like Social Security and Medicare.

The point is that by definition we had economic programs in place to prevent the Great Recession from turning into a Great Depression.

To date, I will give the Obama Administration credit for not ending these programs and throwing us into a Great Depression.  However, that doesn't mean the Obama Administration won't cut back on these programs in pursuit of lowering the fiscal deficit and that we will in fact find ourselves in a second Great Depression.

We have seen in the eurozone's southern peripheral countries what happens when these economic stabilization programs are ended.  Countries like Greece and Spain are suffering a second Great Depression.

Second, the argument assumes that the financial crisis has passed.

A reasonable definition of a financial crisis that has passed is that all the emergency programs that were put in place as temporary measures at the start of the financial crisis have ended.

Zero interest rate policies were put in place as a temporary response and until such time as they are ended the Fed is loudly proclaiming that the financial crisis is still with us.  Please note, Japan's central bank has been saying the same thing for 2+ decades.

No comments: