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Worse Than The Great Depression?

Who’da thunk it? If Bernanke and his gang wouldn’t have rescued BofA, Citi, and Wachovia, the total amount of deposits lost would have been far higher than in the Great Depression of the 1930s. Imagine what could have happened, if Bernanke, Paulsen, Geithner and others weren’t there to rescue everybody. We would have lost Bear Stearns, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Bank Of America, Citibank, Wachovia, perhaps even JP Morgan Chase and Goldman Sachs. In Europe, we could have lost the Royal Bank of Scotland, Lloyds, UBS, and several others. Furthermore, the collapse of those banks would have had grave consequences for other banks that were rather unaffected by the crisis. So, making a rough guess, I’d say that almost every well-known large bank in Europe or the US would have been bankrupt (and several hundreds, if not thousands, of smaller banks). The resulting economic crisis would have been the New Great Depression of 2008-2010.

The main difference between 1929 and 2008 is that banks were not rescued in 1929-33. This led to a massive loss of wealth, which hurt consumption and investment and led to the deflationary spiral, which, over 3-5 years, reduced real GDP and price levels by about 15-25% each (average yearly deflation of about 3-5%). Unemployment rose to over 20% in many countries. Nowadays, our Great Recession of 2008-09 reduced real GDP by 2-5% in most countries, whereas price levels stayed constant. Unemployment rose to over 10% only in some countries like the USA, Spain, and Ireland. Currently, not a single country worldwide experiences something equal to the Great Depression, not even Iceland. Argentina 1999-2003 came close to a repeat of the Great Depression, though they didn’t have large deflation.

So, could it have been even worse than the Great Depression of the 1930s? No. First of all, we do not have gold standard currencies today, so the contagion of crisis would have been more limited. Countries like Germany or France wouldn’t have had to endure the same problems as during the 1930s. Their situation would have been only slightly worse than it is already now, because their problems are the loss of exports and slightly reduced availability of credit due to the partial transmission of the banking crisis, not the actual banking crisis due to bad loans.

Secondly, our “modern” societies are equipped with many social policies which are called “stabilizers” by economists. These include unemployment insurance, welfare, and in many countries also socialized health care. They would have made sure that most people wouldn’t have had to live in the same precarious conditions as our great-grandparents. Nevertheless, for our softened societies it would have been a previously unimaginable drop in living standards.

If people criticize Bernanke and others for what they have done, they should always bear in mind that the alternative outcome would have been far more unpleasent in the short-run. I don’t want to use the term “economic meltdown” that has become so popular with the media, because it suggests that the world would have ended. Our economies would have recovered from such a depression in less than 10 years.


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