"Since the Great Depression"

After news of the Lehman Brothers filing for bankruptcy protection circulated among polticos, Democratic nominee Barack Obama was quick to blame the GOP for the mess.

Democratic presidential nominee Barack Obama said Monday the upheaval on Wall Street was "the most serious financial crisis since the Great Depression" and blamed it on policies that he said Republican rival John McCain supports.

"This country can't afford another four years of this failed philosophy," Obama said after the shock-wave announcements that financial giant Lehman Brothers was filing for Chapter 11 bankruptcy while titan Merrill Lynch was being bought by Bank of America for about $50 billion.

Obama's statement, issued as he prepared to fly to Colorado to begin a swing through contested Western states, was intended to serve two purposes: to link McCain with the unpopular presidency of George W. Bush and to express sympathy with the anxiety of most Americans who say the economy is issue No. 1 in the election.

"The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store," Obama said in a statement. "Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."

I am not sure what government policy caused Lehman Brothers to enter bankruptcy protection, or cause Merrill Lynch to sell to Bank of America, but my guess is that it has more to do with business decisions and market conditions than anything the government did, but that is hyperbole for you.

Interesting, as Obama claims it is the worst financial crisis "Since the Great Depression," there was a Washington Post Op-ed yesterday by Donald Luskin, who writes:

"It was the worst of times, and it was the worst of times."

I imagine that's what Charles Dickens would conclude about the current condition of the U.S. economy, based on the relentless drumbeat of pessimism in the media and on the campaign trail. In the past two months, this newspaper alone has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they've been "since the Great Depression." That diagnosis has been applied twice to the housing "slump" and once to the housing "crisis," to the "severe" decline in home prices, to the "spike" in mortgage foreclosures, to the "change" in the mortgage market and the "turmoil" in debt markets, and to the "crisis" or "meltdown" in financial markets.

It's a virus -- and it's spreading. Do a Google News search for "since the Great Depression," and you come up with more than 4,500 examples of the phrase's use in just the past month.

But that doesn't make any of it true. Things today just aren't that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons.

Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression.

Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that "the entire world is either now locked in a global economic recession or soon will be." Actually, that's a major clue to what started this thought-contagion about everything being the worst it has been "since the Great Depression"

Luskin points the finger at Obama for this belief that the economy is in the tank:

Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it's in his interest to portray the incumbent party's economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."

Look, only a fool would look at the current state of affairs and not wonder if something is wrong, but to say that this is a financial crisis on par with the Great Depression is simply without basis, even assuming we could measure properly the problems. While Luskin is an advisor to the McCain campaign (and thus the blame for pessimism lying solely at the feet of Obama is perhaps a little disingenuous), his statements do have more than a kernal of truth.

For one thing, our understanding of the market and the economy are vastly superior to our understanding 80 years ago and that alone has to account for much of the mitigation of the problems. Luskin goes on to point out that a number of indicators are clearly positive. What this really goes to show is that maybe our measurements of economic health are at fault or incomplete, rather than the "fact" that we are in a "Great Depression"-like financial crisis.

Luskin writes further:

McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession." Maybe he was out of line when he added that the United States has become "a nation of whiners." But when it comes to the economy, we have surely become a nation of exaggerators.

I would agree with both Luskin and Gramm, we are a nation of whiners and exaggerators and that our recession is more of a mental impression built upon repeated media impressions of doom and gloom rather than on hard economic data.

Ironically, Americans may think we are in a recession, but they certainly are not acting like we are in a recession. While the personal savings rate is not exactly high (2.6 percent in Q2 2008, it is higher than the heady days of the Clinton economic expansion (1.9 percent in Q3 2000), and we continue to consume goods at our regular pace. A lot of the loss is in the financial sector, where banks and other institutions have taken risks that in the past panned out, but now are not for a variety of reasons. Lehman and Merrill Lynch are but the latest victims not of government policy gone bad but of financial decisions gone bad.

John McCain is suggeting that the patchwork of regulations needs to be overhauled. But I don't think so. Could the regulations be modernized? Perhaps, but I don't think it is a pressing need. To be sure, there will be calls for more regulations and more disclosure (a la Sarbanes Oxley), but those efforts tend to produce unintended consequences. Right now, investors with Lehman Brothers or Merrill Lynch are not being scalped, indeed they are probably quite busy selling off Lehman stock, and some investors will lose money because of what is happening, but again that is a result of errors in business judgment and not errors in government policy.

Of course saying the financial world is in the worst shape since the Great Depression makes for good politics, it makes for very, very, very bad policy.