Thursday, October 02, 2008

Bad Diagnosis, Bad Cure

President Franklin Delano Roosevelt diagnosed the problems of 1929-32 in his first fireside chat, a week after taking office, as follows:
We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in the handling of people's funds. They had used the money entrusted to them in speculations and unwise loans . . . It was the government's job to straighten out this situation and do it as quickly as possible.

Many years later, this is still the narrative on the far-Left for what caused the Great Depression. This is just wrong. It's just extremely naive to think bad things are caused primarily by bad intentions, because invariably bad ideas, to the extent they are popular, are based on widespread incorrect assumptions that have nothing to do with malice (eg, the malleability of human nature, the Blank Slate, the size of the government multiplier, the irrelevance of down payments on mortgages).

Sure there was incompetence and dishonesty, there has been and will always be, but that was not the distinguishing characteristic of that large decline in the economy, and I know of no reputable economist who considers the Great Depression as primarily an anomaly in 'greed and incompetence'. A solution predicated on such an incorrect diagnosis, leads to the disasters outlined in Amity Shlaes' The Forgotten Man, which turned the 1930's into a prolonged recession, as opposed to the recoveries that occurred after large declines in 1920 or 1838. I have a feeling that most of the policies enacted in response to this crisis will make things worse.

'To do nothing is sometimes a good remedy' said Hippocrates. Especially given the practicalities of politics (the bailout bill sent by Paulson was 3 pages. It's already 450 pages long).


Anonymous said...

buffet is scared. he even let his poker face down couple of times in the charlie rose interview. the bailout is so glaringly wrong it's clear now the buffet sold out. didnt think i'd see this happen.

Anonymous said...

"Never attribute to malice that which can be adequately explained by stupidity"