Betting upon a second Great Depression, or are you like me and thinking that yes, we've got some tough times coming, but the only people that can create disaster are the politicians? Sadly, that last isn't quite as comforting as it could be for it was the politicians and bank regulation itself that created the first depression: as long as we don't make the same mistakes again (or newer and even more inventive ones) the disaster, although perhaps not a recession, can be avoided.
Yes, irrational exuberance in the 20s, then the Great Crash, then recession. So far, so very like our own times. But what took it from a crash to a depression, that's the part we want to know, so that we can avoid doing that.
I don't think tariffs were the real problem. No, I think the blame should be on three things. The first is that the Fed refused to cut interest rates. The second was a large tax rise so as to cut the budget deficit (alarming as it may seem, Keynes was right in part, deficit spending does mitigate recessions, it's the cutting of the spending in the good times that governments have so much problem with). The third was the then extant system of bank regulation.
U.S. banking then was based on the single branch model: banks did not have widely diversified portfolios of risks, either geographically or by industry sector. Rather, all of their exposure was concentrated in the immediate hinterlands of their one deposit taking branch. This led to a certain fragility: it's worth noting that in Canada no banks went bust, while 8,000 did in the US. Canadian banks were allowed to operate countrywide, thus providing them with that diversification. It's that mass bankruptcy of banks which turned the shrinking of the credit markets into a rout.
Which brings us back to today: we see people arguing for some of the same things, but let's try not to make those same mistakes again, shall we? The first and most obvious is that we should ignore those siren calls for tax hikes, whether they're from deficit hawks or from those insistent that “the rich” should pay more. No, in an economy with contracting credit deficit spending is a rather good idea. Bernanke and his boys are most certainly not leaving interest rates too high, so that's one thing we don't need to worry about. Which leaves us, domestically, with just one thing—bank regulation.
Yes, we do have successive financial crises, that's in the nature of a market system that people will try new things and some of them will be stupid (making a loss is the market's way of telling you that you are indeed doing something stupid), but they're not all caused by the same things. Limits upon the mortgage markets and syndication are simply unneccessary: no one is going to make that mistake again, as they're not going to overinvest in telecoms companies with “interesting” accounting techniques, nor internet stocks, nor emerging nations, to give just a flavor of what has caused previous problems. Lessons learned at the cost of hundreds of billions of dollars tend to stay learned.
The second revolves around that very diversification which we would rather like banks to get themselves involved in. Christian Noyer, the governor of the French Central Bank (in reality, he's the provincial manager of the French branch of the European Central Bank) makes the point that the sub-prime crisis isn't going to topple European banks precisely because “their model of universal banking allows them to mitigate the consequences of a crisis in one segment of their activity.“ UBS may have been hit with vastly larger losses than Bear Sterns, but it didn't go bust because it has other business lines and resources to draw upon.
More good points in the article... I think trade might have been more important than he thinks because of the corresponding capital flows and investment stemming therefrom. Also, as for lessons learned, new mistakes will be made unlike the old ones but limits on leverage are appropriate for review to guard against systemic risk.