The crisis of 2008 really started worse than the Great Depression

Ten years ago, we were struck by the biggest financial shock of world history, worse than the Great Depression.

Indeed, in the 1930s, "only" one-third of US banks failed, while in 2008, former Federal Reserve Chairman Ben S. Bernanke said that 12 of the 13 plus Major financial institutions of the country were about to be released. outside. A big part of the reason things were potentially much more apocalyptic this time around was that we had made banking easier. Previously, banks had borrowed money from depositors to lend themselves, which meant that any panic required people to withdraw their money individually. Now, however, many banks have borrowed money from the markets to be able to all go bankrupt overnight if these broke down – what they did.

Thus, if nothing had been done, almost all the big banks would have collapsed and, if not, the creditworthy companies would not have been able to borrow the money they needed to deal with their debt. payroll or manage the rest of their daily operations. The Fed should have gone from lender of last resort to lender of only resort – replace those parts of the financial system itself – just so we can continue to have an economy. In these conditions, it was enough to flirt with this possibility to bring down the world economy in free fall.

As economists Barry Eichengreen and Kevin O. Rourke have shown, global inventories, trade and production all actually declined faster in 2008 than in 1929. Perhaps the best example of speed with which has not been exposed to subprime mortgages, the banks, which relied on borrowing the money they needed in the markets, have gone from a growth of 3.5 % just before the collapse of Lehman Bros.

The heart of the economy – the financial system – has stopped worldwide.

Now, in the years that followed, there was a debate among those who think that policy makers deserve to do enough to prevent a second Great Depression, and those who say that politicians have not done enough to prevent a second Great Depression. too much. as necessary. They both have a point. On one side, Bernanke is probably right, as he explains in a new newspaper, that it was rather the panic caused by the real estate crash than the real estate crash itself which explains why the slowdown was originally as deep as it was.

The economy, after all, lost an average of 185,000 jobs a month in the six months leading up to the Lehman bankruptcy, which lost an average of 646,000 jobs a month in the next six months. It was not just a question of a credit cut for households and businesses – even if it was certainly the case – but also because they were so marked by experience that they were reducing more than their expenses than you thought. In other words, it was a psychological crisis that lasted even after the end of the financial part.

On the other hand, the fact is that the economy was already in recession when Lehman fell, and that would have continued even if the company had been saved. The simple story is that the fall in housing prices and the rise in the unemployment rate would have been mutual for a while. In the beginning, unemployment had increased because housing prices were falling, with construction workers losing their jobs and consumers losing access to home equity lines of credit, but home prices lost their jobs could no longer to afford their mortgages. This did not help households to borrow so much during the years of prosperity that they had to drastically reduce their spending during the crisis. This recession was going to be disastrous, brutal and long, even if the financial system had not been hit by a panic that had made the Great Depression relatively small in comparison.

All this to say that saving the banks was necessary, but not a sufficient condition for recovery. A modern economy simply can not work without a financial system to transfer money where it is needed. The fact is that it can not grow either if households are in debt. Policymakers were rightly disposed to do whatever it took to solve this first problem, bad policies being condemned, but not the second. Yes, there was a stimulus, and yes, there were programs to help homeowners refinance their mortgages, but neither one nor the other was close to home. scale required. Indeed, the economic recovery was only $ 700 billion when Christina Romer, adviser to President Barack Obama, estimated that the economy needed $ 1.8 trillion of aid.

The painful lesson we've learned is that you can not overdo it when you're dealing with a great depression, but it's too easy to do too little.