No, Obama is NOT Causing Another Great Depression


Recently, two of my PolicyMic colleagues, John Giokaris and Gary W. Patterson, Jr., tried to convince you that President Obama is following the same economic policies that made the Great Depression last for years, exacerbating our 21st century Great Recession.

The biggest problem of the article — and with most economic arguments of the authors' flavor today — is their failure to differentiate between "typical" recessions caused by inflation, deflation or boom/bust business cycles and "atypical" financial crises characterized by sudden asset devaluation, the freezing of loans and massive bank failures. Nearly every single recession or depression in U.S. history has been one of the former. Both of the Greats were the latter, which is why they're "Great" in name. This first failure to make a distinction results in all kinds of other misunderstandings about the role of government in a free market economy, as they scramble to bend the facts to fit a pre-conceived hypothesis about the nature of markets and governments.

Their article's thesis claims that government attempts to correct our nation's economic woes are misguided — however, well intentioned — and are actively making the problem worse: government should just get out of the way.

One of their central arguments is that government intervention is what caused the whole mess in the first place. After all, if government caused the problem, how can it possibly solve the problem? In fact, they manage to explain in a single sentence what caused the entire 2008 collapse: 

"What truly caused the Great Recession of 2008 was the housing market crash that occurred as a result of the affordable housing crusade through Fannie Mae and Freddie Mac." 

As a general rule of thumb, a single-sentence explanation to the cause of the Great Recession should be a big red flag (a great, easy-to-follow, eleven-minute visual-explanation of the crisis can be found here. I also highly recommend The Big Short). That red flag is doubly important when the hyperlink provided isn't a link to a study, but just a link to another article (study-free!) by the author. 

Despite the more than 30 hyperlinks throughout their article, the authors only actually presented a single study to buttress this claim. The study, commissioned by the National Bureau of Economic Research — a private research organization — found that the Community Reinvestment Act (CRA) led to an increase in "risky lending." They don't tell you that this study was highly controversial or that it stood nearly alone in the literature on this topic. That aside, they also fail to provide evidence linking this finding to their claim.

The CRA requires some banks to provide loans to low-income Americans and has been in place since 1977. Giokaris and Patterson, Jr. assert that this NBER study shows an "overwhelming connection" between the government requiring a small number of home loans be made to working class families and the collapse of the U.S. housing market in 2006-2008. 

You might have noticed that they fail to actually give you any numbers about how many U.S. subprime mortgage loans were subject to CRA review: 6%.


According to the Fed, just 6% of all higher-priced (i.e. high interest rate, not high dollar amount) subprime mortgages from 2004 to 2006 were made by financial institutions subject to CRA requirements. If you extend that out to the entire US mortgage market, that number drops to just 1.3% of all US mortgages issued from 2004 to 2006.

In addition, the Fed also found that during 2006-2008, "foreclosure filings have increased at a faster pace in middle- or higher-income areas than in lower-income areas that are the focus of the CRA," and "CRA- related loans appear to perform comparably to other types of subprime loans."

Keep in mind that Giokaris and Patterson told you that there was an "overwhelming connection" between CRA and the Great Recession. 

I get into this protracted explanation about a single paragraph of their article because it is a textbook example of trying to make unwilling facts fit a pre-determined narrative. Reality is not so malleable. 

After casually and misleadingly asserting that the CRA was responsible for the Great Recession, the authors then move back to two previous 20th century recessions as case studies to support their argument that government should just get out of the way. 

They look at the Depression of 1920-21 and the Reagan Recession. Never mind the fact that they blatantly lift the first sentence of the Wikipedia article about the Depression of 1920-21 without citation. And I think they confused the unemployment rate when President Reagan entered office in January 1981 with something else. They claimed it was at 11% and fell to 6% by the time he left office. The U.S. unemployment rate was actually 7.5% in January 1981. That aside, the larger problem with these two examples is that the authors are comparing apples to oranges.

The Depression of 1920-21, as the authors mention, was most directly caused by massive deflation — an 18% drop in a single year. The Reagan Recession was a more normal business boom and bust-type recession.

Neither of the Greats was brought on by deflation (like 1920-21) or typical boom-bust cycles (like 1981-83) to the extent that we understand their causes at all. Both Greats were financial crises. And there's a vast difference between a financial crisis and a typical recession.

Economists Kenneth Rogoff and Carmen Reinhart, both widely respected for their research into eight centuries of financial crisis documented in This Time Is Different, explain the differences in the opening of, The Aftermath of Financial Crises, an NBER paper, emphasis mine: 

First, asset market collapses are deep and prolonged. Real housing price declines average 35% stretched out over six years, while equity price collapses average 55% over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9%, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86% in the major post–World War II episodes. 

While I can certainly understand the frustration facing Giokaris and Patterson, Jr., the reality is that the United States has never faced economic crises quite like the Great Recession or Great Depression before, and comparing them to other kinds of recessions doesn't work. They look at the Great Depression and see that it lasted a long, long time and that the Roosevelt Administration spent a lot of money trying to solve it and were largely unsuccessful until World War II. There seem to be parallels to other examples. But given the vast, meaningful differences between financial crisis and typical recession there's simply no basis to make the assertions that Giokaris and Patterson, Jr. try to make beyond the post hoc ergo propter hoc explanation that they provide. 

American conservatives used to understand that if something sounds too good to be true, it probably is. Somewhere along the way, we lost that, and today articles like the one penned by Giokaris and Patterson, Jr. are all too common, offering a simple, black-and-white prescription. If only solving these kinds of massive economic problems and restoring work and wealth to tens of millions of Americans were so easy.