Dissent Of The Day

A reader writes:

Your political thinking and analysis is a true joy to read, but when it comes to economics and particularly financial economics, it's apparent you don't know a hill of beans. I think you've acknowledged this on a number of occasions, but nevertheless it's distressing to read you repeatedly downplaying the potential consequences of the current financial/banking crisis, as in last night's "Next Steps" post: "Unless, of course, we come to realize that letting these banks fail under their rotten loans is not the end of the world. If the world doesn't end, wouldn't the bailout lose more support?"

It's painful to read you make these remarks because your views seem to have been formed in a historical vacuum. It's totally out of character for you, a thinker who so clearly recognizes the importance of historical knowledge and context in understanding and analyzing contemporary politics and economics.

At the very least you could spend a bit of time reading the historical record of the consequences of large-scale banking crises in industrial countries.

There have been dozens of them. They are universally disastrous. You don't need to be a highly trained financial analyst or economist to absorb this lesson. Across country after country, the record shows the same pattern of severe economic consequences, including substantial economic contraction, massive private sector layoffs, sharply higher unemployment, and persistently weak growth lasting several years. And this is in cases where national governments intervene aggressively (with "bail-outs"), i.e., these are the best-case scenarios. For a worst-case scenario, look at the "lost decade" in Japan, I assume you've heard of it. It was caused by a national banking crisis for god's sake, not to mention ten years of inept public policy response.

If after you've reviewed this historical record you can come up with reasons why "this time it's different," then by all means explain to your readers why, and then continue to question whether things will really be that bad if we don't get some sort of major public sector intervention. But until you've done this, it would seem appropriate to be a bit more doubtful about your own skepticism towards the need for public sector action.