The financial panics of last September and October will always be part of the story of this recession, just as bank failures are always part of the Great Depression story. But recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.
In his academic research, Ben S. Bernanke blamed part of the Great Depression of the 1930s on banking panics. And this time last year (at the height of the panic in the commercial-paper market) he was telling President Bush that if “we don’t act boldly, Mr. President, we could be in a depression greater than the Great Depression.” A lot of taxpayer money was spent based on this theory.
Some recent research supports an alternative view: that those financial panics did not cause depressions, but are merely symptoms of deeper economic forces.
The U.C.L.A. economics professor Lee Ohanian’s recent paper has looked at monthly data from the 1930s and finds that bank failures came well after manufacturing establishments had sharply dropped their work hours. Moreover, the banks failing during the initial panics were known to be weak. Whatever brought those weak 1930s banks down had already hit the manufacturing sector hard.
The timing was different in this recession — the largest employment drops seemed to come immediately after the financial panic — but a recent paper by Ravi Jagannathan, Mudit Kapoor and Ernst Schaumburg of Northwestern argues that the coincidence is just as misleading. They argue that the changing global economy — with more employment of residents in developing countries like China — created a glut of savings in those countries, and was destined to reduce employment in developed countries regardless of whether there had been a financial panic.
The foreclosure crisis is not fully behind us, and the time may come again when it looks like “banks are in trouble.” When that time comes, will taxpayers still believe Mr. Bernanke’s theory that they are better off financing bailouts than letting a bank panic run its course?
This is a dishonest article, Casey. The Ravi Jagannathan, Mudit Kapoor and Ernst Schaumburg does not say that the losses of employment we have had over the past 12 months were the inevitable cause of “global imbalances” and had nothing to do with the banking crisis. Rather, they are saying that the underlying causes of the crisis reflect greater structural challenges– namely, a rise in the global labor force (the supply of capital) without a corresponding rise in the demand for global end goods and services. That is true. What they are not saying, however, is that the job market has nothing to do with the health of the banking system.
So many people have said we should have not done anything and just “let the crisis run its course.” I wish more than anything in the world that we could go back to last fall and create an “alternate reality” where we do just let things run its course and let the banks fail.
We would see (1) a collapse in the commercial paper market, (2) bankruptcy of large sections of the Dow & S&P, including giants like GE, (3) as these companies go bankrupt, they liquidate rather than restructure in court due to lack of DIP financing, (4) 2-3 million job losses per month if we are lucky, (5) $3+ trillion deficits IF the government attempts to maintain statutory limits, (6) mass sovereign defaults all over the developing world, (7) probably another world war somewhere down the line.
I would like the world to see that and then say don’t bail out the banks. Let the populists rant and rave then. Unfortunately we have one world, and I’d rather see Ben Bernanke get beat up by the newspapers, blogs and politicians than see that reality come about. Good day, Casey Mulligan.