Economic Cycles Are Far Bigger than Presidents

I’ve never had a good word to say about Barack Obama, and I’m not going to start now. But it would be disingenuous to blame him for the Great Recession that has persisted for most Americans since the downturn ended officially in 2009. Politically speaking, there is nothing Obama or any other president could have done to alter the course of economic events after real estate prices collapsed in 2007-08. This happened on George W. Bush’s watch, but he can’t be blamed either, since the factors leading up to the crash had been gathering strength for more than a generation. Economic cycles are far bigger than the presidency, and anyone in the White House when times are good is simply lucky to be in the right place at the right time. Luckiest of all was Bill Clinton, who, for all his personal failings, is recalled almost nostalgically because of the relatively prosperous economic times America enjoyed during his tenure as president.

Obama, on the other hand, inherited a mess that no president, Democrat or Republican, could have cleaned up. There was but one solution that would have worked: Let the system fail, and then regenerate itself. Of course, that could never have happened in the real world — even with Ron Paul in the White House and a veto-proof Libertarian majority in both houses of Congress. Yes, they initially would have stood on principle. But not for long, and certainly not for the full length of an election cycle. If laissez-faire economics had obtained during the Great Financial Crash, it seems likely the entire banking system would have collapsed rather than just a few big players such as Lehman and Bear Stearns that were sacrificed to make it appear the government had control of the situation.

Why Risk Collapse?

The outcome we’ve experienced may have permanently conditioned politicians and the banking interests they serve to do the wrong thing no matter what. Why risk a total collapse of the financial system when you can create a false prosperity that lasts indefinitely? Of course, we know that these so-so economic times will eventually end. But who’s to say we can’t muddle along for another ten years?  Under the circumstances, only an exceedingly bold and principled politician could declare for taking our lumps now and getting it over with. No such politician would be even remotely electable, as we know, although his ideas might be taken seriously after-the-fact in the throes of an economic depression.

Jim Grant argues in his latest book that the boom times that followed the severe downturn of 1920-21 are proof enough that non-intervention can work. He refers to the economic crisis of this period as “the last unmedicated depression,” noting that President Harding elected to do nothing as prices and wages fell. Grant implicitly believes this could work again. While undoubtedly true in a literal sense,  it’s arguable that the cure, with global credit inflated to its present extreme, would require a catastrophic shakeout rather than a mere reset of cyclical economic trends.  Instead, we face the more or less predictable course of continuing to muddle along – until we don’t.