What If We Hadn’t Done the Bailouts

Populists on the left and opportunists on the right have taken to condemning the series of “bailouts” the government has undertaken since the fall of Lehman Brothers. And certainly I think these situations have been mishandled in a number of respects. And beyond that, I think these situations are inherently problematic in a variety of ways. But there’s a strong case to be made that the policy response to the recession has made things better than they might otherwise have been. When I say something like that, people tend to pester me in response for specifics: What, exactly, would have happened if we’d just let AIG and Citi and Bank of America and others collapse? The problem is that it’s impossible to say, in detail, what would have happened.

Kevin Drum, however, makes the excellent point that we can illustrate this in part with reference to Justin Fox’s chart of today’s job losses versus the Great Depression:

Consider, after all, that our response to the Depression appears to have been 180 degrees wrong. We literally did almost everything possible to make it worse: we tightened the money supply, balanced the budget, raised interest rates, passed protectionist legislation, and allowed banks to fail by the hundreds. It escalated a panic into a Depression. And this time around? Just the opposite: interest rates are close to zero, we’re running an enormous budget deficit, protectionism has largely been kept at bay, money is being pumped into the economy prodigiously, and with the notable exception of Lehman Brothers banks are being saved right and left. These actions have reduced a panic to a severe recession. If we had taken the same policy actions that Hoover and Mellon took in the 30s, does anyone doubt that the results would have been another Great Depression? I don’t. We may still be doing a lot of dumb things, but we’re an awful lot smarter than we were 80 years ago.

Kevin’s right. The right-wing advocates of no bailout and “spending freeze” are, in essence, calling for a return to the Hoover-Mellon policies that had disastrous results in the past. The nature of those results is spelled out in the chart. What people are living through today is no walk in the park, but it’s vastly better than the alternative. Meanwhile, the left-populist alternative of no bailouts and massive stimulus wouldn’t have been quite as bad because some proportion of the masses of the unemployed could have been employed in public sector jobs. To get stimulus on that scale, however, would have required an extremely high percentage of pure makework and essentially wasted funds.


What we’re seeing today is policy that’s basically on the right track, with errors on the margin. What we saw in the past was policy that was pointed in the complete wrong direction, married to good ideas like public relief on the margin. Unfortunately, as you can see on the chart there’s a ton of room between “not as bad as the Great Depression” and “worse than all the other post-war recessions.” And if we stay stuck in that territory for a long time, as I fear we might, there’s a real chance that voters will conclude in 2010 and 2012 that “bailouts and stimulus don’t work” and we’ll respond to continuing economic weakness with Hooverite policies that push us off the cliff.