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The Wrongheaded Bailout Defense By Comparing to Other Financial Crises

The above chart has generated some attention. Rather than compare the current unemployment trajectory to previous postwar recessions, as Bill McBride at Calculated Risk has consistently done with “the scariest chart ever,” Josh Lerner uses the Reinhart-Rogoff analysis of financial crises to generate a new chart, comparing the unemployment rate to those from other incidents of this type. Lerner considers this more of an apples-to-apples comparison, and on those grounds, the current crisis looks mainly OK. “Financial crisis” is a pretty big category that brings in a host of different situations, but let’s allow that for the moment. Lerner explains:

This is likely due to the coordinated global response to the immediate crises in late 2008 and early 2009. While the initial path of both the global and U.S. economies in 2008 and 2009 effectively matched the early years of the Great Depression – or worse – the strong policy response employed by nearly all major economies – both monetary and fiscal – helped stop the economic free fall.

Joe Weisenthal extrapolates this out to announce a success for bailouts above Swedish-style bank nationalizations. Indeed, the Swedish line on this chart doesn’t return to pre-crisis employment rates for 17 years.

I think that’s way too premature. First of all, the US remains 4% below the pre-recession employment level. That seems like the wrong time to declare victory, especially because the distinguishing feature of all of these other trajectories are peaks and valleys. Outside of perhaps Norway in he late 1980s, really none of them have a U shape, with an unbroken fall followed by an unbroken rise. The last bit of the US line shows some leveling off, in fact.

If the distinction is between Sweden’s nationalization and a Japan-style bailout, furthermore, it should be said that in the long run, Sweden makes out much better. Japan just kind of hovers with a sick economy and a stagnant employment sector, and then falls off. They never purged the problems from their system, and they suffered for it. Once these other countries get a handle on the scope of their problems, they return to health pretty dramatically. That’s not what we’re seeing in the United States. It can be argued that, outside of Japan, this chart shows the slowest recovery by the US current policy. We did the best job of identifying the problem and coordinating a global response, which of course no other country on this list could do – none of them were superpowers at the time. But the bounce-back has been merely modest.

So comparing a global bailout to a situation in tiny Sweden seems to me completely misguided. And yet, it’s not entirely clear that the US compares favorably even in that case. Weisenthal is just wrong here. And we need much more data, over several years, before determining the optimum response.

It should also be said that this chart shows the effectiveness of accommodation policies in the fiscal and monetary sphere, and it actually shows the need to do more, not to defend the status quo.

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David Dayen

David Dayen

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