Wednesday, October 01, 2008

Avoiding the last economic disaster

I thought this column from yesterday's Boston Globe kind of interesting.
In 1914, the world went to a war that nobody really wanted in which "miscalculations, hubris, bellicosity, fear of looking weak" led to World War I. What could have better described Bush's war of choice in Iraq? Hubris, bellicosity, and the fear of looking weak, we now know, all played roles in the decision to invade, but miscalculation trumped them all.

On the other extreme, Gates said, was Neville Chamberlains's decision in 1938 to allow Hitler to dismember Czechoslovakia because ethnic Germans predominated in one corner, the Sudetenland.

… Gates was right that those two starkly opposing examples have overshadowed decision-making ever since.
Just as generals are always "fighting the last war" politicians are always avoiding the last wrong decision.

Today I was reading this column from the (London) Times about the banking crisis when I came across this. "Mr Bernanke did his PhD thesis on the 1929-1934 Great Depression".

At first, I thought that was good. Gives him a lot of perspective. Then I started wondering if that also makes him more prone to panic when he sees conditions in the financial world that he believes are similar to those that led to the crash in October 1929.

I started wondering if he's avoiding the last economic calamity and driving us straight into something new and, possibly, worse. For example, will the bailout (or rescue plan) and all it entails absolutely kill the dollar, which might be a lot worse than letting the big banks fail. I don't know.

I then decided to see what Bernanke has written on the depression of the 1930s. I haven't had a chance to read any of this yet, but there are a number of papers here and you can read his book Essays on the Great Depression here. {And, I have no idea how much overlap there is from his academic papers and his book.}

I've said that I'm in favor of the bailout, if it's necessary. I'd love to find the time to read some of what Bernanke has said about the Great Depression and see if I agree that the current conditions are similar. Also, since Monday's vote I've been reading about other possible remedies that might be better. Here's one suggestion from George Soros, who I don't like.

I honestly wish I could come to a definite conclusion as to what is the best thing to do, but right now I'm hedging my bets and hoping Congress will too. Take a few days, a week and get it right rather than rushing into a disaster.