Financial Panic Is No Solution to Economic Woes

Last Wednesday the New York Times' Economix Blog published an article written by Casey B. Mulligan, suggesting President Obama consider letting “a bank panic run its course."

While Dr. Mulligan is an economics professor at the University of Chicago and the New York Times is one of the most respected publications in the world, this article shouldn’t have seen the light of day and is a disappointing mistake by the New York Times. The last President who believed financial panics and bank runs were economic tools to purge the economy of excess was Herbert Hoover. Competent journalists and economists should intuitively know that the United States doesn’t need to try Hoover’s policies and see if they work better the second time around.

The idea that financial panics and bank runs could be good for the economy is ridiculous and a lie.

Bank panics are economic meltdowns that kill the fabric of society by snuffing out economic activity and causing mass human suffering. Letting a bank panic run its course makes about as much sense as letting a nuclear meltdown go critical. While nuclear winter may not be as bad or last as long as everyone thinks, no sane U.S. President will intentionally roll the dice on uncontrolled thermonuclear reactions and then see who survives. Nor will any U.S. President let a bank panic run its course because of the real chance that there won’t be anything left of the economy or society to rebuild.

Just as nuclear contamination lasts a long time, uncontrolled bank panics kill economic activity for decades. Without banks, money doesn’t work as a means for commerce and exchange and barter takes over as the primary mechanism for commerce. Just try to imagine going to the grocery store and bartering for food, bartering for shelter or bartering for police protection. What would you offer to the local supermarket in exchange for food? In today’s economy, which is based upon specialization and service, how many of us makes anything that we can barter to survive? If a bank panic goes critical we may have to learn to live in a world without ATMs, credit cards and checks. And try to imagine a world without enough money currency to go around. The destruction of modern U.S. society and the American way of life is one of the possible side effects of an uncontrolled melt down of the financial system.

I thought that the United States turned its back on the “liquidationist” school of economic thought when it rejected Andrew Mellon’s justification for Hoover’s economic policies/ (Mellon was the Secretary of the Treasury under Herbert Hoover who thought that financial panics and bank runs are good for the economy.) Since the Great Depression it has been an article of faith between the government and its citizens that Hooverism is dead and won’t be coming back anytime soon. Rewriting this social compact benefits no body and smacks of either political opportunism or media grandstanding. Either way, the New York Times is supposed to know better and be more discriminating in what it publishes.

And, just like the New York Times should have known better, there is no place for a serious economist to advocate or accept mass suffering as “good” for the economy. Mulligan’s pedigree and employer doesn’t make his words any less ridiculous than someone who is less educated and doesn’t have any knowledge of economic history. It’s just that after years of being educated and studying Mulligan was supposed to have learned something rather than learned what seems to be nothing.

Brad DeLong summed up his thoughts on Economix and this article when he wrote….

Can We Please Shut Down the New York Times’s Economix Now?

This is the final straw:

Recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.

That most people writing for Economix are good is no excuse. You read it and you trust it, and you know less afterwards than you knew when you started.

Why oh why can’t we have a better press corps?

Comments

[Jasper M:]

Geez, where to start?

First of all, our Republic has weathered many, Many bank panics, and they haven't "killed" anything "for decades", exCept when the government uses them as an excuse to expand its power, by trying to hold back the tide. The effect os most bank panics in American history lasted about a year.

Second the, comparison to a nuclear meltdown is inapt, as there is n upside to that sort of event, while the collapse of a credit inflation is inevitable, necessary, in the long run a Good thing . . . and conceivably profitable for those who are properly prepared.

(by the way, a technical note, reactor meltdowns are not posited to produce "nuclear winter")

The fact that "United States turned its back on the “liquidationist” school of economic thought . . . " is one of the primary REASons we are here today, at the burning peak of a credit inflation of a magnitude the planet has not seen since the 1720's, with NO alternate course. The credit supply Will collapse; banks Will fail, by the Hundreds. Those that have resisted liquidation so successfully, for so long, have insured it.

Anyone who is not a little panicy is either very well prepared, or not paying attention.

Oct 27 04:48 PM

[The Geoffster:]

Socializing the pain has not solved anything. It's just spread the misery.

Oct 27 08:12 PM

[Dirk McCoy:]

There are two extreme solutions, credit collapse-bank panic Armageddon, or debt forgiveness-bailout mentality avoidance. Neither is optimal, as they reward those who are most malfeasant while changing the socio-economic contract- you have to pay back what you borrow.

What is the optimal solution? Monetization. This makes it easier to pay back debt, while punishing those who gave out too much credit. The risk is inflation, which will reduce living standards- especially if social security, welfare, and minimum wage entitlements aren't indexed.

But shouldn't this be the fate of those who borrow more than they can repay? And technology, increased global production capacity, and recognition of the fairness of living within one's means (no matter how meager) can mitigate the worst effects of this shift upon the national psyche.

Oct 28 11:30 AM