The New York Times, May 20, 2014
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There were three ways to deal with the financial crisis facing the country in the fall of 2008: A bailout with very stringent conditions, letting the market run its course and picking up the pieces afterwards, or a bailout that largely left the financial industry intact.
Unfortunately, we got the last option, which has left us with an economy that still suffers from massive unemployment and a badly bloated financial sector.
The best path would have been the first, bailing out the financial institutions with special loans and guarantees from the Fed, Treasury and the Federal Deposit Insurance Corporation as long as the institutions agreed to downsize, on a set timetable, to become a boring bank.
In the crisis environment of 2008, any bank that didn't sign this commitment would have quickly gone into bankruptcy with its top officers facing a lifetime of civil suits and possible criminal actions.
If that path proved impossible for political reasons, the next best option would have been the second course, letting the market work its magic on the Wall Street boys. Most people have said this would have led to a second Great Depression. This is nonsense.
Ever since Keynes wrote almost 80 years ago, we have known the secret of getting out of a depression. It's called "spending money." We tested this with the massive spending associated with World War II, and it worked. The unemployment rate fell to 2 percent.
Saying we’d face a second Great Depression if we didn't save the hides of the Wall Street crew would mean our political system is so dysfunctional that Congress and the president would just sit on their hands as the country saw unemployment soar into the double digits.
Anything is of course possible, but there is zero evidence to support such a claim. President George W. Bush signed the first stimulus package when the unemployment rate was just 4.8 percent.
The Second Great Depression myth was invented by the Wall Street crew to justify saving them from their own recklessness. As a result we got the worst of all possible outcomes.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.