Thursday, January 20, 2011

The Second Great Depression?

One basis for deciding whether we are in a "recession" or a "depression" is distinguishing how recessions become depressions. With the hindsight of history, we already know.

Parallels between America's current economic crisis and the 1930's Great Depression are instructive. Then, as now, hardship was preceded by a major banking upheaval. Then, as now, a regulatory blizzard followed. Then, as now, millions were displaced. And then, as now, the cause of the Great Depression was widely misunderstood. Many believe today that the 1929 stock market crash caused the Great Depression all by itself, that it was so severe it mysteriously destroyed wealth for another 13 years. To put that in perspective, the serious Carter-era recession should have, by this logic, precluded the Reagan recovery in 1982 and perhaps wreaked havoc until 1990. Not only is this argument absurd, it manifestly did not happen.

In Franklin Delano Roosevelt's 1933 inaugural address he lectured that "[t]he only thing we have to fear is fear itself," suggesting Americans suffered irrational neuroses. This is not at all true. Americans made entirely rational and prudent business decisions amidst considerable uncertainty. Though FDR is invariably cast as heroically facing down near-insurmountable economic travails, the less-flattering diagnosis is much more obviously true: he caused them.

Read more: The Great Depression II

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