The case in favor of a second Great Depression

Why we shouldn't have bailed out the banks: A truly horrible financial crisis would have inspired real change

Published August 26, 2009 3:50PM (EDT)

Megan McArdle just blew my mind, providing the single most compelling reason why bailing out the banks was a really bad idea.

Yesteday, McArdle echoed Tyler Cowen's grudging defense of the bailout and asked her libertarian-minded readers to "sketch a plausible alternative scenario."

(Cowen had argued that the panic doubtless to ensue if there had been no bailout would have resulted in stronger government intervention later -- "a much worse and costlier bailout run by Congress and Nancy Pelosi.")

Julian Sanchez demurred, arguing that if legislators had had the guts to stop the first bailout, they would also have had the backbone to stop a second one.

To which McArdle responded:

In 1929, the federal government and the federal reserve took little action to bail out the banks. In 1932, we elected FDR.

That was a long time ago. But when you look at modern financial crises from Iceland to Argentina, what you see is that they have a tendency to produce some, well, radical changes in the political culture. Moreover, those trends usually tend towards populism, redistribution, and state control of substantial segments of the economy. So if we hadn't had our Pelosis now, we'd have had them by 2012. To a first approximation, I'd say that the bailouts are the reason that we won't have a single-payer health system or actual national automakers any time soon.

Of course, for McArdle, a single-payer health system and populist redistribution appear to be bad things. I think many Salon readers would disagree. So I put the question to you, readers: Would a second Great Depression have been worth it if it resulted in real health care reform and the redistribution of wealth, somewhere down the line?

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Bank Bailouts How The World Works U.s. Economy