In “The Great Depression and the Great Recession in the North Atlantic”, Brad DeLong writes:
Diagnoses of how we got into this mess and why we are still mired in it–albeit to a substantially less degree than in 2009, and to a much less degree than in 2009 we feared we would be in 2010–vary. Let me give you my take–which is disputable, and indeed often disputed. I follow my next-door office neighbor at Berkeley, Barry Eichengreen, and find that one of the many important factors that has led to our current situation was the intellectual success of a book: Milton Friedman and Anna Jacobsen Schwartz’s A Monetary History of the United States. You can read Barry’s version of the argument in his excellent and brand-new book, Hall of Mirrors [see here for a comment on Eichengreen]
…And of course, the textbook Friedmanite cure was tried á outrance over 2008-2010 and proved insufficient. The monetary policy that Ben Bernanke pursued was Friedman-Schwartz to the max(!). It cushioned the downturn–the U.S. has done better than western Europe about to the degree that Bernanke was more aggressive in lowering interest rates and buying bonds for cash than his European counterpart Trichet. That is evidence that Friedman and his monetarists were wrong about the Great Depression as well. There are thus few people today who have properly done their homework who would say, as Ben Bernanke said to Milton Friedman and Anna Schwartz in 2002:
You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
And right now Ben Bernanke, now at the Brookings Institution, has changed his mind. He is now calling for Keynesian cures–expansionary fiscal policy, especially infrastructure spending, as the bet road forward.
And because the intellectual victory in the 1970s and 1980s was complete, policymakers in 2008-2010 were hesitant and unwilling to apply the Keynesian and Minskyite cures to severe downturns enthusiastically enough and on a large enough scale to adequately deal with the problems that emerged. When the collapse came, the economists advising the North Atlantic’s governments and central banks were not ready.
Why did the collapse come? Start with the huge rise in wealth among the world’s richest 0.1% and 0.01% from the 1970s into the 200s, and the consequent pressure for people, governments, and companies to take on increasingly unsustainable levels of debt. Continue with policymakers lulled into complacency by the widespread acceptance of the “efficient-market hypothesis”–believing that investors in deregulated financial markets were relatively good judges of risk. End with hubris: the confidence in the Federal Reserve and elsewhere that grew because the Penn Central collapse of 1970, the Latin American financial crisis of 1982, the stock market crash of 1987, the S&L crisis of 1991, the Mexican crisis of 1995, the East Asian crisis of 1997, the Russian/LTCM crisis of 1998, and the dot-com crash of 2000 had not caused the Federal Reserve problems that it could not handle well enough to keep the unemployment rate from going up by more than two percentage points.
The reasoning can only be a bad sign of the times!