NYTimes.com Video: 'Lesson' from 1930s: Government the Solution

     To market, to market to buy a fat bailout.

     “The government is doing what it can. They’ve learned the lessons of the 30s. And the lesson of the 30s was to put ideology aside and do whatever you can to bail it out,” New York Times Chief Financial Correspondent Floyd Norris said in an Oct. 8 video on the publication’s Web site entitled “Echoes from a Dismal Past.”

     “I agree with you,” economics reporter Louis Uchitelle said, also pointing out that it took two years before the government really “stepped in and acted” during the Depression – referring to Franklin Roosevelt’s action.

     Norris said one of the first lessons of the 1930s was that bailing banks out would “limit the damage of the financial crisis.”

     “If you go back just two or three years ago, you had this powerful argument that government was the problem. So there is emerging from this an understanding that markets and government are married whether they like it or not,” Uchitelle said.

     Despite the reporters’ assertions that the lesson from the 1930s was that government should have a big presence in markets, there are experts who say that market intervention actually made the situation worse.

     In 2004, economists at the University of California, Los Angeles (UCLA), studied the policies of President Franklin Roosevelt’s New Deal and determined his policies prolonged the Depression by seven years.

     Harold L. Cole and Lee E. Ohanian blamed anti-free market measures for the slow recovery in an article published in the August 2004 issue of the Journal of Political Economy.

     Cole and Ohanian asserted that Roosevelt thought excessive business competition led to low prices and wages, adding to the severity of the Depression.

     “[Roosevelt] came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies," Cole said in a press release dated Aug. 10, 2004.

     Talking about the 2008 economy, Ohanian said in an interview with Reason.tv, "Periods of crisis often beget bad policies." The professor stressed that six weeks ago the fundamentals of the economy looked “pretty good,” before bailout “rumors” caused “panic.”

     Ohanian criticized the handling of the credit crisis by Secretary of Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke because the government intervention caused people to panic.

     “Secretary Paulson and Chairman Bernanke when they first proposed the rescue plan told Congress, ‘If you don’t pass this and if you don’t pass this right away, we may not have an economy in a couple of days,” the professor said. "And those types of messages – very scary, frightening messages were issued sort of on a daily basis, by, including President Bush, and people hear this and people start to get scared.”

     It was obvious lenders had pulled back to see how the government bailout “plays out,” according to Ohanian.

     “When the rumor mill gets started about ‘This is going to cost $700 billion. The banking system is going down the drain. We’ve got to take over the banking system if we ever hope to be an economy again.’ It’s hard not to fall into that trap.” Ohanian explained.