Ezra Klein has just written a 6700 word piece looking back at how we failed to cope with Great Recession, “Could this time have been different?” The title is a reference to the book This Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Ken Rogoff, who published most of their book’s significant findings in a series of papers in the months before the book appeared.
Reinhard and Rogoff’s work is based on a large database of financial crises, and takes note of the fact that people never seem to learn—they always assume that the crises they’re dealing with will be different from past crises, for some damn reason or another. At the same time, another crucial point of their research is that financial crises are not like ordinary recessions that don’t originate in the financial sector—they are much more severe and difficult to recover from.
Klein’s conclusion, after much huffing and puffing is that “There were many paths that could have been taken in January 2009, and any one would have made this time a bit different. But not different enough. Not as different as we wish.” This is hardly surprising, given Klein’s wonkishness and fixation on “politically feasible” policy options or their near kind. Yet, if one didread Reinhart and Rogoff at the beginning of Obama’s presidency, it should have been obvious then that nothing “politically feasible” would work—the only thing that would work would be to redefine what was politically feasible—you know, the sort of thing that transformational leadership is supposed to be all about. (Remember when Obama was hailed as a “transformational leader”???) If Obama had encouraged his supporters back then to take the kind of sustained, shift-the-goal-posts action that Occupy Wall Street is taking now, then, yes, we very might have made this time different. At the very least, we would have avoided the sort of drastic regression that we’ve witnessed so far.
It’s not as if this couldn’t have been foreseen. I should know: one person who did take Reinhart and Rogoff serious back then was me. In my slightly early 100-day assessment of Obama at Open Left, “Hundred Days: Four Major Political Themes” I wrote:
As the 100-day mark approaches, I see four major political themes. These are:
(1) Obama’s sustained popularity, despite GOP polarization.
(2) The GOP’s collapse into political incoherence.
(3) The Democrats’ inability–even unwillingness–to capitalize on the GOP’s collapse into political incoherence.
(4) The gathering of storm-clouds beyond the immediate reality of (1)-(3) that could spell big trouble for the Democrats, and actually allow the GOP to get back in the game as early as 2010 or 2012, but definitely by 2016. OTOH, if the Democrats did pay attention to these gathering clouds and do something about them, then another 30-40 years of electoral dominance could easily become possible.
I went on to list a number of specifics under (4):
(4a) Global Warming….
(4b) A law-based, “beyond war” foreign policy….
(4c) Sacrificing the rule of law for “political peace” will leave us with neither. This has been a failed calculus ever since Watergate. There’s no reason to expect this work any better this time than it did in the past….
(4d) Universal health care as a human right. Accepting the corporate capitalist definition of the problem and acceptable solutions dooms Obama’s efforts to partial success at best….
(4e) Employee Free Choice Act. This is crucial for any sort of long-term political realignment, as well as reversing the 30-year economic polarization trend….
And, most importantly for the purposes at hand:
(4f) A myopic economic policy that fails to take seriously the true magnitude of the crisis we’re in. This is a theme that economists such as Krugman and Stiglitz have harped on repeatedly. I’d like to offer a few different charts to drive home the point.
First is this series of charts from “The Aftermath of Financial Crises” (Dec 19, 2008 draft) by Carmen M. Reinhart (University of Maryland. NBER and CEPR) and Kenneth S. Rogoff (Harvard University and NBER). It consists of an analysis of a set of severe banking crises, in order to provide a reasonable framework for understanding what we are currently going through. At the beginning of their paper, the authors say:
A year ago, we (Carmen M. Reinhart and Kenneth S. Rogoff, 2008a) presented a historical analysis comparing the run-up to the 2007 U.S. subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II. We showed that standard indicators for the United States, such as asset price inflation, rising leverage, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis-indeed, a severe one. In this paper, we engage in a similar comparative historical analysis that is focused on the aftermath of systemic banking crises.
You can go to the original post to see the charts I used. They clearly show that what we’re experiencing now is TOTALLY NORMAL for the sort of financial crises we just went through. If only Obama had been the least bit reality-oriented, instead of hippy-punching those who were, he might not be in such bad shape just now. And—more importantly—neither would the rest of us.
p.s. One chart tracks the increase in public debt over three years following the crisis. The average increase is 86%. The US debt in August, 2008, just before the bubble burst, was just under $10 billion. It’s now about 14.8 billion–an increase of 48%. So actually, by historical standards, we’re doing pretty well. OTOH, if we had spent another $2 billion, to put us right at the historical averge, we’d probably be a great deal closer to a reasonable recover by now.