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February 8th, 2010 at 10:53 am

Do bailouts work?

Robert WrightIn The Great Recession of 2008 and the Sordid Historiography of the Great Depression, an article just published on the History News Network, Robert E. Wright, editor of Bailouts: Public Money, Profit, argues that policymakers’ and scholars’ misinterpretations of the Great Depression have led to bad choices in responding to economic crises.

More precisely, scholars have “present[ed] the public and policymakers with two contrasting views of the Depression, one that blames markets and another that points an accusing finger at the government.” In addressing the current economic crisis, Wright suggests that the “bipolar view” of the Depression, has led to a:

hodgepodge of policies, many slathered with pork, instead of policies based on a reasoned analysis of causes and cures. The U.S. economy has begun to recover, but no sooner or faster than it might have with a much smaller but more carefully focused intervention. The cost of dodging dodgy claims of an impending repeat of the Depression is itself depressing: the federal budget deficit and national debt have greatly deteriorated, fear of a bout of 1970s-style inflation or worse is growing, and the moral hazard created by the bailouts and another long period of low interest rates seem destined to puff up yet another volatile asset bubble. The bailouts got us out of the woods but perhaps by beckoning us into a much larger and more menacing forest.

Wright believes that neither markets not government is to blame but the ways in which they interact and their entanglements. Understanding this and pursuing a more balanced approach to the crisis of 2008 “would have been more measured and precise.” Wright concludes:

Some intervention was needed to shore up bank balance sheets and prevent a deadly decline of the money supply. The dire pronouncements of government officials and the costly, scattergun approach to the bailout, however, ranged from unhelpful to outright counterproductive.

Complex events like financial crises have complex causes. With careful study and an eye to both market and government failures, those causes can be ascertained, explicated, and used to guide future financial system regulations and bailout policies. If and when we will learn those lessons, however, remains to be seen.

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