Economic Growth since 1875. Bankrupt banks and the Fed damage growth

Graph attached from U Minnesota, an Ivory Tower free market alternative to the east coast Ivy League Keynesian establishment. The great depression was really a big catastrophe. Our recent recession is not nearly so bad. Fiscal cliff sequestration cuts to government spending hopefully will begin March 1. Compare U.S. economic growth over the period 1875-2010 to a 2 percent per year trend. Notice how trivial business cycle fluctuations are in comparison to the 1929-39 Great Depression. We need new tools to study great depressions. A book, edited by Tim Kehoe and Ed Prescott, provides these tools. Written a short paper explaining how studying great depressions of the past is essential for understanding the recent financial crisis. Bloomberg News in March 2009 about the relevance of this paper for the U.S. financial crisis. Some Banks Must Die So the U.S. Economy Can Live. Historical evidence suggests that “bad government policies are responsible for causing great depressions,” write Timothy J. Kehoe, professor of economics at the University of Minnesota. He’s opposed to rewarding people who made bad investments. “The TARP money disappeared; it was scandalous,” Kehoe says, referring to the Treasury’s Troubled Asset Relief Program. “It went to people who made bad investments to try to pull them out.” study Kehoe and Edward Prescott, recipient of the 2004 Nobel Prize in economics, have been running at the Minneapolis Fed, analyzing depressions in North America and Western Europe in the 1930s, Latin American in the 1980s and isolated examples elsewhere. “All these depressions are associated with bad policies that depress the efficiency of production,” Prescott says in a phone interview. “The focus should be on productivity. History provides no support for stimulus.” The current crisis and recession may be different than previous ones in terms of their size and scope, but that does nothing to contradict Kehoe’s belief that the financial system needs to be “cleaned out.”


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