In general I’m not big on worrying about how we’re setting ourselves up for the next crisis; after all, we’re nowhere near done with the current crisis. Yet it is worth noting that current trends in our policy and political discourse, in addition to blocking efforts to promote recovery, is also setting the stage for a much worse crisis further down the line.
Consider a question some of us ponder now and then: this was bad, but it wasn’t a full replay of the Great Depression. Why?
I think we know the answer:
1. Central banks intervened massively to provide liquidity, preventing a replay of the 1931 global banking crisis. They were able to do this because, as an interesting paper I missed (pdf) points out, they weren’t constrained by the gold standard.
2. Although there wasn’t much effective discretionary stimulus, automatic stabilizers that didn’t exist in 1931 did a lot to cushion the economy.
On the latter point, let me repost a figure I’ve used before:
So it wasn’t just the fact that taxes fell while spending didn’t; the safety net programs also kicked in (and were about the only thing that did).
So consider, now, what’s going on politically. Gold bugs have taken over the GOP; even if they can’t reimpose the gold standard, they will make it very hard for future Bernankes to do even as much as the current one did to fight the crisis. And there’s a big push on not just to downsize government, but to convert federal programs like Medicaid and unemployment insurance into block grants,more or less ensuring that they will be cut rather than expanding in a slump.
In short, what we now have is a political drive that will, in effect, undo all those institutional changes that prevented the Great Recession into turning into another Great Depression.