Learning From History

http://www.realclearpolitics.com/articles/2010/05/12/depression_2010_105530.html

Very well done article that argues that the Great Depression was caused more by a failure to deal with inevitable and wrenching changes, rather than simply a failure to act quickly enough to deal with relatively minor financial market problems. It is understandable and well worth reading through. The basic theory is that the depression was caused by the need to depart from the gold standard and the need to define a new world economic leader to replace Britain. This depression is caused by the financial impossibility of a sustained Welfare State and the shift of global dominance from the US / Japan / Europe to China and India.

I nabbed a couple teasers, but I'd recommend the whole thing.

There are eerie, if crude, parallels now. The welfare state is today's equivalent of the gold standard. With aging societies, advanced countries have promised more benefits than their tax bases can support. Hence, high government debt. Greece is merely the canary in the coal mine. But politicians resist cutting popular benefits except under extreme pressure. It takes a crisis. Greece, again. Another unsettling parallel is the global economy. The United States' leadership since World War II is eroding before China's ascent. There's a danger now, as then, of a power vacuum. Witness the long delay in coming to Greece's aid. No one country acted decisively, even as markets grew nervous.


The case that we have dodged a second Great Depression rests on a narrower notion: that the Depression was preventable; and that advances in economic knowledge allowed us to do so. If we knew then what we know now, governments could have averted the tragedy. Despite some disagreements, economic scholars subscribe to a broad consensus about what went wrong in the 1930s. Government central banks, like the Fed, were too passive. They didn't halt bank panics. Intervention at decisive moments (perhaps the failure of the Bank of the United States in late 1930 or Austria's Credit Anstalt in spring 1931) could have changed history. Instead, mounting unemployment and falling prices fed on each other. Debtors couldn't repay loans, leading to more bank failures, a contraction of credit and deposit losses. But this time the mistakes were not repeated. Despite criticism, banks were "bailed out." Money was pumped into credit markets to pre-empt a downward spiral.