Deposits in Failed Banks as a Percent of GDP

Rolfe Winkler says suggestions that the current financial crisis was not as bad as the Great Depression are wrong and he offers this chart as evidence:

He adds:

If you add JP Morgan (JPM) and Wells Fargo (WFC) to the chart, it looks much worse. Goldman (GS) and Morgan Stanley (MS) don’t have deposits, but did have $2 trillion in liabilities between them as of August 31, ‘08

The Fed deserves more credit than it is getting for avoiding a much, much worse outcome for the economy. Yes, the Fed made mistakes, but are you really convinced that if Bernanke had been replaced by Larry Summers – and that was the likely outcome if he had been removed no matter how much you might wish it to be otherwise – things would have been better rather than worse? I’m not.

But I do want to add a few words about Bernanke’s recent testimony before congress. I criticized Greenspan for taking a stand on fiscal policy in his testimony before congress, and I am not pleased that Bernanke waded into these waters. I think it’s fine for the Fed chair to explain how budget deficits interact with monetary policy, how budget deficits affect the Fed’s policy choices, what the Fed is likely to do if deficits persist (e.g., when markets return to normal, if deficits begin pressuring interest rates upward, will the Fed let interest rates rise or not?), matters that affect monetary policy in a fairly direct fashion. But to take stands on particular programs (e.g. Social Security and Medicare), to give advice on fiscal policy beyond its implications for monetary policy, to comment on matters outside of its purview unnecessarily politicizes the Fed. I have supported Bernanke’s reappointment (if for no other reason than it’s hard to imagine a viable candidate who would do better – be careful what you wish for), but this was disappointing.

Chart: Reuters

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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