Bryan Caplan  

Did Armageddon Happen?

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Several people in both Sweden and the U.S. have asked me if the bail-outs of 2008 saved us from "financial Armageddon" or "financial Götterdämmerung."  My question: What does Armageddon look like?  Suppose there had been no bail-outs, and everything that's happened since happened anyway.  How many pundits would claim that the world we now see around us was indeed the foretold Armageddon?  Half?

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COMMENTS (9 to date)
Drewfuss writes:

The very concept of 'what would have happened' is essentially unscientific, or at least unfalsifiable (ha!). It is however, a fantastic excuse for failure if you can get away with it - "it would have been even worse if we'd done nothing!"

Imagine if that became excepted practise generally. We could all then perform some arbitary action when faced with some unusual degree of uncertainty ('do domething'), and then claim, for any negative outcome, that it would have been worse otherwise.

Civilization would collapse very quickly. Armageddon indeed!

Claiming that the bailouts prevented some unthinkable economic collapse is just a very human way of dealing with uncertainty, in that it disguises the true motivation - to avoid admitting that we do not have a model to deal with what happened to Wall St last year.

Unfortunately, the 'wise men' ruling the republic cannot be seen to be lacking wisdom on any important matter, hence the need for the domino scare.

Tom writes:

From Dec. 07 to Sept. 08 the unemployment rate increased 1.3 percentage points. From September 08 (when the politicians announced the need for the bailout and it subsequent passage) to July 09 the unemployment rate has increased 3.2 percentage points. The recession has worsened since the bailout and stimulus!

Tom writes:

On the jobs front the bailout looks even worse than on the unemployment rate front. From Dec. 07 to Sept. 08 the economy lost 1.42 million jobs. From September 08 (when the politicians announced the need for the bailout and it subsequent passage) to July 09 the economy has lost 5.24 million jobs.

Things have certainly gotten a lot worse than better since the bailout. The bailout apologists will say yeah but it could have been even worse. Let's say you got ill and decided to see the doctor. If his treatments were making you progressively worse and worse after each dose of treatment, would you buy the doctors explanation that without his treatment you would be in even worse shape or would you fire his ass and find a different doctor?

Boonton writes:

How much worse? Well the Great Depression had unemployment spike up to 25% and, more importantly, prolonged periods of low to negative growth.

Imagine, though, a time machine was invented and Ben B. was sent back to run the Fed. Suppose instead of a Great Depression we had 3 years of unemployment at 10% and then recovery. From our POV that would be a great improvement. From the POV of 1930's America, it would be a horrible recession.

The very concept of 'what would have happened' is essentially unscientific, or at least unfalsifiable (ha!). It is however, a fantastic excuse for failure if you can get away with it - "it would have been even worse if we'd done nothing!"

But it could have been. It's not unscientific, in fact its a statement of facts. Just as there are things that could have been a lot better had we done something different, things could have also been a lot worse. The lack of a time machine does not negate that truth.

But as for being a fantastic excuse for failure...well not quite. The time traveling central banker probably wouldn't be hailed as a hero. In order for this 'excuse' to work people have to buy it. Sometimes they do, sometimes they don't.

For example, in 2004 the Republicans used it with the line "the terrorists haven't attacked again". It worked a bit, but in 2008 that same line didn't work so well (for the most part, people didn't believe a Republican in the White House kept NYC from going up in a mushroom cloud).

Drewfuss writes:

Would it be valid to say that without Bernanke's actions, bank reserves would not have multiplied 400 fold, instead remaining at historical levels, and then surmise that economic performance would have been essentially identical over the last few quarters - and then elevate this bit of historical contrarianism to the status of 'true fact'?

I regard there being certain minimal standards of objectivity that are necessary to keep civilisation functioning, and deflating the value of actual facts by conflating them with 'what would have been' 'facts', does not meet those standards. The example given by Boonton regarding the Republican's and terrorism is good one.

Boonton writes:

True but then this should work in both directions. Would 9/11 have not happened if:

*we had better airport security

*more cooporation between CIA/FBI

*more focus on the ME and terrorism after Bush took office....

But this is the same reasoning as 'we saved the world' but in reverse. If you are going to make judgments, you are engaging in a counter factual. Either Bush's choices made the world turn out better or worse. Either we'd be at 30% unemployment today or 5% if Bernanke and TARP turned out differently.

Drewfuss writes:

"...this should work in both directions."

You mean, it should apply equally to bourgeois logic and proletariat logic?

Drewfuss writes:

Hebert Hoover speaking during the 1932 presidential campaign:

"We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered.... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for ... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom.... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction."

The Cupboard Is Bare writes:

Without realizing what they are doing, I think that many parents raise children who engage in "Armageddon thinking".

How do they do this? By telling their children that if they do or don't do certain things that something terrible will happen or that something terrible will be avoided. There's really no way for a child to prove or disprove the parent's claims. Children who buy into this kind of thinking become easy marks for the politicians later on in life.

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