For the majority of us, the credit crisis we are living through has come rather unexpectedly. And because it has been both a surprise to many and a traumatic experience to yet many more, we are all trying to contextualize it using past economic and historical periods. Unfortunately, this is a tricky exercise because it risks conflating the root causes and outcomes of the historical period with those of the present. But, we are going to still do it because the need to explain is so great (something I covered in The politics of economics in November).
For me, it is the Great Depression where I see the greatest lessons for us today, particularly given the parallels in complacency today and that witnessed in 1930 and 1931. So let me say a few words about where I think we are in this crisis and what this should mean to policy makers and citizens alike.
When I first wrote about what was then an impending credit crisis in March 2008, I spoke of its roots being in the accumulation of high private sector debt burdens due to easy money. What has become clear since that time is the level of fraud that also occurred due to the lax regulatory environment. So, in many ways, the pre-conditions of this crisis were very similar to those that created the Great Depression (low interest rates, high private sector debt, globalization, large current account imbalances, speculative mania, a financialized economy, lax regulation, cronyism and fraud).
What we are now being told is that the response in this particular downturn has been very aggressive and all-encompassing across the globe. The result, we are told is that we are out of the woods economically.
But, is that really true? I would agree that we have averted the worst. However, I would argue that the global economy is still so fragile that complacency still risks a catastrophic outcome.
– Read more at Hopes for avoiding a second (fatal) credit crisis –