As we wait on tenterhooks to learn whether Washington’s feckless and free-spending politicians will manage to turn this recession into a Greater Depression (or possibly a Weimar-style hyperinflation), or if we’ll escape with only a few years of Carter-era stagflation, it’s a good time to take a new look at lessons from the financial crises of the past. Robert Murphy has a warning for the Obama Administration: Don’t try another New Deal -- or we may end up with another Great Depression.

The Great Depression and the New Deal make a perfect topic for the Politically Incorrect Guide series. It’s difficult to think of another historical period that’s more misunderstood and mistaught. If Americans know anything about the period, they “know” that FDR’s radical interventions in the economy pulled us out of the Depression. And yet, as Murphy demonstrates, the Depression is called Great precisely because it lasted longer than any other depression in American history -- thanks to Roosevelt’s unprecedented attempts to resolve it by government action.

The Politically Incorrect Guide to the [Great Depression and the New Deal] is worth reading for the period quotations alone. Murphy quotes Lionel Robbins, a 1934 economist whose critique of government policies in response to the 1929 crash would seem to apply today: “We prefer the lingering disease … the efforts of central banks and governments have been directed to propping up bad business positions.” Hoover and Roosevelt wouldn’t follow Andrew Mellon’s excellent advice, and neither did Bush nor will Obama, but it’s good to be reminded that clear-thinking people then, as now, saw that necessary bankruptcies, not bailouts, are the way forward to a healthy economy: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

# posted by Bob Murphy @ 3:46 PM