This semester I'm teaching American Economic History and using, among other books, Bob Higgs' Crisis and Leviathan. The students love it and I never get tired of teaching it. One of the points Bob hits over and over is how crises leave residues, both institutional and ideological. Even as the scale of government retreats after a crisis, the scope does less so as many of the powers created by the crisis remain in place, often embodied in institutions that outlive it. And crises obviously change the way we view the world, and those ideological changes linger on as well, often embodied in textbooks and "what everyone knows."
In reading a student paper today, which showed a glimpse of the point I'm about to make, it struck me that the current crisis can fruitfully be understood as the product of both kinds of residues. More specifically, as I've argued in my Open Letter, the causes of the crisis are to be found in a variety of banking regulations and powers of the Fed, many of which have their roots in the Great Depression. Fannie Mae was created in 1938 and the Fed was given the power to conduct open market operations in 1935. Federal deposit insurance dates from this era as well. More generally, the Great Depression legitimated the kind of regulatory powers that were deployed to push up rates of homeownership. These are powers government might not have had were it not for the Depression.
On the other side, the response to the current crisis reflects the ideological residue of the Great Depression in the assumption that we need massive government intervention to stabilize individual markets and the macroeconomy more generally. The reaction to the problems in financial markets has very much been an example of these residual ideological beliefs that find many of their origins in the 1930s. I'm thinking here of the concerns about contagion and the generalized belief that market-based banking was shown to be unstable in the early 30s. The bailout reflects these ideological residues as well. (Yes, I realize that the bailout is one great rent-seeking festival, but my point is to explain why intellectuals, the media, and many citizens support it even without a direct stake in the matter.)
We really are living out the extended negative unintended consequences of the Great Depression. If so, it only goes to show how important it is for us not to do what precisely we seem to have done in the last few months: over-react to a questionable "crisis" in ways that create new institutions that will long outlive the current situation and lead us to tell new stories that will harden into uncritically accepted ideological narratives for future generations. We are currently suffering from the sins of Hoover, FDR, and many idea-makers of that era. We should have learned our lesson, but it would seem not. I hope we still have time to control the narrative (I'm less sure we have the time to undo the institutions) and do better by our children and grandchildren than prior generations did by us.