Nobel Prize–winning economist Gary Becker says the current financial crisis is minor compared to the Great Depression:The magnitude of this financial disturbance should be placed in perspective. Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s.
He is not fond of government bailouts, but he has this to say about TARP:
Taxpayers may be stuck with hundreds of billions of dollars of losses from the various government insurance provisions and government purchases of assets. Although the media has made much of this possibility through headlines like "$700 Billion Bailout," such large losses are highly unlikely except in the low probability event that the economy falls into a sustained major depression. Indeed, with efficient auctions, the government may well make money on its actions, just as the Resolution Trust Corporation that took over many savings-and-loan banks during the 1980s crisis did not lose much, if any, money. By buying assets when they are depressed and waiting out the crisis, the government may have a profit on these assets when they are finally sold back to the private sector. Making money does not mean the government involvement is wise, but the likely losses to taxpayers are being greatly exaggerated.
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"Indeed, with efficient auctions, the government may well make money on its actions ..."
ReplyDeleteOooh! Oooh! I want to live in economic utopia efficiency fantasy land too! But guess what, they've pretty much admitted they'll be paying above-market prices for these fecal assets.
"...just as the Resolution Trust Corporation that took over many savings-and-loan banks during the 1980s crisis did not lose much, if any, money."
ReplyDeletean audit by the GAO of RTC reported a loss of $88 billion (p 9) from the S&L debacle. disclaimer: i have not read the entire audit.
here it is, have at it:
http://www.gao.gov/archive/1996/ai96123.pdf
While Mr. Becker may be right in the end, if there are parallels to the Great Depression, we are still in 1930 after the stock market crash in late 1929. It was the consequences of the crash and the resulting bank runs that dried up credit and led to the resulting 25% unemployment rate.
ReplyDeleteHe could perhaps say that the mechanisms for dealing with such a crisis are better, which will prevent a crisis as severe as the Great Depression. Saying we don't have 25% unemployment is not predictive. I look to economist to provide information about leading indicators, not give static information.
Better analysis is needed from Becker or a fuller view of his reasoning.