Saturday, August 08, 2009

Our saviours?

David Leonhardt, an economics writer at The New York Times, has started a meme that I expect to accelerate in the days and weeks ahead: that the oft-derided coterie of Bernanke, Paulson, Geithner and other leading economic figures should be given their due for heading off a fearsome recession/financial crisis:
What if in the end they got it right?

What if, amid all their missteps and all the harsh criticism, the people in charge of battling the worst financial crisis since the Great Depression — Ben Bernanke, Timothy Geithner, Lawrence Summers, Henry Paulson and the rest — basically succeeded? It is clearly too soon to know for sure.

But the evidence is now pointing pretty strongly in one direction: history books may conclude that the financial crisis of 2008 turned out to be far less bad than it could have been and that Washington deserved much of the credit.
Perhaps. But perhaps there is another explanation -- that all economic crises eventually end and this one had simply run its course. After, given that the average recession since 1919 has lasted 13 months -- and more recent ones have been shorter -- and the current one started in December 2007 then it's about time for this thing to end.

Of course, engaging in counterfactuals is always difficult. We will never know what the outcome would have been if officials in Washington had simply thrown up their hands, declared there was nothing they could do, and let the market take its course. Leonhardt says that history has been unkind to those governments that took a hands-off approach, but his evidence is pretty weak:
But the best clue may be history. Washington did not respond proactively to the financial crisis of 1929, and the Great Depression ensued. Japan didn’t respond to its 1990s crisis with much force, and its economy languished.
The notion that Hoover responded to the 1929 crisis by taking a hands-off approach is a myth as I have previously explained. Japan, meanwhile, passed 10 stimulus packages from 1992-2000 to no great effect.

Also, as I have previously noted, the severe 1921 recession met with little response from Washington and a swift recovery ensued. The notion that our economic leaders should be praised for their actions in the last 11 months is not at all clear.

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