America already saved the world once

More

The wrangling persists over the desirability of President Obama's recent stimulus package.  The uncomfortable fact is that America, and the West as a whole, is having a pretty grim experience.  Eventually, the passage of time will restore confidence. But the problem is that there are really three separate recessions going on, all at the same time.


During 2008, commodity prices, including oil, were very high.  We have been here before, when the oil price quadrupled in 1973/74.  Temporarily, this transferred income from the West to the producers, which created the recession of the mid-1970s.  This, like the commodity price-induced recession of 2008, was short and shallow.  But it was still a recession.

In the fall of 2008, the credit crunch hit home.  We have already seen the dramatic consequences on the viability of commercial companies in the real economy.  On top of this, we have a third problem: a potential shift in consumer attitudes.  Personal consumption is around two-thirds of US GDP.  If consumers decide to become more frugal, if saving rather than spending becomes fashionable, huge amounts of spending will be taken out of the economy.

People are generally right to be sceptical of policymakers.  But despite this, and all the current problems, the response of the authorities in September of last year was brilliant.  Fannie Mae and Freddie Mac nationalised; AIG effectively taken into public ownership; money market funds guaranteed by the Fed; huge, failing retail banks forced into mergers; investment banks eliminated. (OK, letting Lehman go was one Darwinian experiment too many.) 

But without these measures, we would already be looking at a recession of 1930s proportions, with unemployment rising inexorably over the 20 percent mark.  The hotly disputed TARP programme was second-order compared to the measures actually carried.

The abiding lesson of the 1930s is that in a financial crisis, however unfair it may be, banks are more important than people.  The banking system has to be defended at all costs.  America did this -- and (not for the first and probably not the last time) really did save the world.

Jump to comments
Presented by

Paul Ormerod

Paul Ormerod is the founding director of Volterra Consulting and the author of Why Most Things Fail.
Get Today's Top Stories in Your Inbox (preview)

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Business

Just In