In a short and insightful article on Blogcritics, Kenn Jacobine has uncovered something which the media and all the blog pundits seem to have missed. There is a report from economists led by Timothy Kehoe which was commissioned by the Federal Reserve and uses solid historical research to show very convincingly that government overreaction with things like bailouts and massive stimulus spending is directly responsible for turning recessions into depressions.
Working with examples going back to the 1980s these economists show how countries like Mexico and Japan which followed the Keynesian model and responded to recessions with the same kind of panic spending our government is currently engaging in, prolonged recessions and turned them in to long, slow economic depressions. In contrast countries like Chile and Finland which responded in ways which were harsher in the short term but more fiscally responsible, which shut down businesses and banks and let people go bankrupt, ended up recovering quickly and having much stronger long-term economies.
That this study could have been commissioned and published by the Federal Reserve and be for sale on their website while they utterly ignore its findings and continue to advise more deficit spending and bailouts is the height of stupidity and incompetence. To remind them of this, the authors have just released a short version of their report which is a must read for anyone concerned about our economic future. Their conclusion really says it all:
“Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression.”
That we should have spent trillions and are preparing to spend trillions more on a policy which history demonstrates is dead wrong, is inexcusable and unforgivable.