The Duck of Minerva

The Duck Quacks at Twilight

What, me Worry? The Financial Crisis

March 14, 2010

Are we doing better or worse than in the Great Depression? Are we coming out of it, or still sinking… or, is there worse to come? Should I be frightened?? Recent reports of millions more foreclosures made me wonder what direction we are going in. A couple of things I’ve been reading recently:

Over at Vox, Eichengreen and O’Rourke answer the question on a lot of minds: is this crisis as bad as the Crash and Great Depression of the 1930s? They provide nice graphs of output, trade, and stock markets for both periods. Two things stand out to me: the collapse in trade and stock markets in the last two years was even scarier than in the past–sharper, faster, deeper (output tracks the 1930s slide pretty closely); but, all three trend lines have turned up again pretty quickly. Not recovering anywhere near to previous levels, mind you, but heading in the right direction. Eichenbreen and O’Rourke believe policy action– the stimulus–is what is saving us this time around. When the stimulus runs out, what happens?

My colleague Carmen Reinhart and co-author Kenneth Rogoff look at the aftermath of asset bubbles and really don’t give me much hope. (also see their recent book on eight centuries of financial crises) Looking at a broad range of countries in the post WWII years, they show that after a financial crisis housing assets take about six years to recover, sinking by 35%, and equity collapses over 50% in about 3.5 years. Unemployment rises and output declines, not surprisingly. And government debt explodes– not due to bailouts but due to a decline in government revenues. But bailouts will become politically more and more difficult as government debt expands.

Jayati Ghosh reminds us of Galbraith‘s work on financial euphorias, and our own role in them. After a crisis, according to Ghosh/ Galbraith, we point the finger of blame away from ourselves–yet, remember how we admired and fawned over the financial “titans” we now deplore? (on a side note, I’m not sure about the timing of Wall Street 2) Our own euphoria encourages financial speculation, and markets respond with asset bubbles. We think the problems are only caused by greedy and unscrupulous people, not the market itself. Ghosh argues that the solution is to re-think capitalism itself. But, as someone recently pointed out (can’t remember who), during the Great Depression, there were a number of readily available alternative models– fascism, communism– what is the alternative today? Populism a la Chavez? I don’t think so…

So, should I be scared? I think I’ll have to just hold my breath and wait and see.

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Virginia Haufler is Associate Professor in the Department of Government and Politics at the University of Maryland, College Park and is affiliated with the Center for International Development and Conflict Management. Her research focuses on the changing nature of governance in the global political economy, especially the role of transnational corporations and corporate social responsibility. Her current research examines how transnational regulation of the private sector addresses issues of conflict and corruption.

She is also Director of the Global Communities Living-Learning Program, which introduces freshmen to scholarship and experiences that explore globalization, global issues and intercultural understanding. She has been a visiting scholar at University College London, University of California-Irvine, the University of Southern California, and the Carnegie Endowment for International Peace. She has pressented her work at conferences, workshops and talks in more than a dozen countries. She has served on the boards of non-profit organizations, including Women in International Security, the Peace Research Institute Frankfurt, and the OEF Foundation, and has advised the Principles for Responsible Investment and the Business4Peace Platform of the UN Global Compact. She has a M.A./Ph.D from Cornell University and dual B.A. from Pennsylvania State University.