What Happened to the Government's Duty to Iron Out the Business Cycle?
Ezra Klein Is Making No Sense

What Lessons from the Little Depression?

Ezra Klein is scared by the financial crisis:

And ultimately, that’s what makes the financial crisis so scary. The complexity of the system far exceeded the capacity of the participants, experts and watchdogs. Even after the crisis happened, it was devilishly hard to understand what was going on. Some people managed to connect the right dots, in the right ways and at the right times, but not so many, and not through such reproducible methods, that it’s clear how we can make their success the norm. But it is clear that our key systems are going to continue growing more complex, and we’re not getting any smarter, or any less able to ignore risks that we know we should be preparing for. “Inside Job” may have missed that story, but the rest of us can’t afford to.


In order to have successfully predicted that we would be where we are now, you would have to have predicted a large number of things:

  1. That a global savings glut and a period of low interest rates would produce a housing boom.

  2. That the housing boom would turn into a housing bubble.

  3. That the housing bubble would lead to a collapse of mortgage underwriting standards.

  4. That risk management practices on Wall Street would have been nonexistent.

  5. That the Federal Reserve would not be able to construct its usual firewall between finance and the real economy.

  6. That the Federal Reserve would not feel itself empowered to take the emergency steps to stabilize demand needed during and in the immediate aftermath of the financial crisis.

  7. That the incoming Obama administration would come out of the gate with too small an economic recovery package.

  8. That politics would prevent the Obama administration from being able to take a second bite at the apple.

  9. That the Obama administration would then give up on pushing the envelope of its powers to try to generate a strong recovery.

  10. That the intellectual victory of Keynesian approaches on the level of reality--forecasting and accounting for the course of the Little Depression--would be accompanied by a non-intellectual defeat of Keynesian approaches on the level of politics.

Get all of those 10 right, and you are a wizard.

But I know of nobody who did.

The smart people I know--there imagination failed after number five or so. Indeed, I--and most reality-based economists--failed at (4): Wall Street was supposed to be full of professional risk managers. Instead, it was composed of clueless large bank CEOs leveraging up their organizations while thee subordinates underneath them sold unhedged out of the money puts.

But I am not sure the story is complex, exactly...