Why we didn’t revisit the 1930s

The basic theme in Mr. Bernanke’s memoir is that the shocks of 2008 were bad enough that there could have been a full replay of the Great Depression. The reason there wasn’t is that central banks in 2008 went all out to keep the markets working, while in the 1930s they sat immobilized as the financial system crashed. Should we believe this story?

It’s not a hard one to tell – and I very much agree with Mr. Bernanke that pulling out all the stops was the right thing to do. You don’t play games at such times.

But I’m not persuaded that the real difference between 2008 and 1930-31 (which is when the Depression turned Great) lies in central bank action, or the related bailouts.

It’s true that the ’30s were marked by a big financial disruption; one measure (which I learned about from Mr. Bernanke’s academic work) is the soaring spread between slightly risky corporate bonds and government debt. But there was also a big financial disruption in 2008-9, and one that was comparable in size by this measure. It didn’t last as long, but that may be as much an effect as a cause of the country’s failure to experience a full-blown depression.

Why was the 2008 disruption so large despite the bailouts and emergency lending? Well, banks by and large didn’t collapse, but shadow banking rapidly shriveled up. Liquidity for everything but the safest of assets disappeared, even though the giant financial firms remained.

And if we’re looking for effects of tightening credit conditions, remember that credit policy usually exerts its biggest effects through housing – and housing investment fell more than 60 percent as a share of gross domestic product in the United States during the last crisis. But even a total collapse of home lending couldn’t have subtracted more than a point or two off aggregate demand.

So, really, was putting a limit on the financial crisis the reason we didn’t fully repeat the 1930s? Or was it something else?

There is one other huge difference between the world in 2008 and the world in 1930: big government – not so much in terms of deliberate stimulus, although that helped, but as automatic stabilizers (think unemployment insurance). The budget deficit in the United States widened much more in 2007-10 than it did in 1930-33, even though the slump was much milder, simply because taxing and spending were much larger as a share of G.D.P. And that budget deficit was a good thing, supporting demand at a crucial time.

Again, Mr. Bernanke and company were right to step in forcefully. But I’d argue that the fiscal environment was probably more important than the monetary actions in limiting the damage. Oh, and since 2010, officials everywhere, but especially in Europe, have been doing all they can to undo the favorable effects of automatic stabilizers. And the result is that Europe’s economic performance is at this point considerably worse than it was at this point in the 1930s.