What can be even worse than a stock market crash -- including the great crash of 1929 -- are politicians rushing in to fix things. At one time, it was widely assumed that the 1929 crash led directly to the Great Depression that lasted throughout the decade of the 1930s. Now, more and more people who have studied that era have come to see what the government itself did to help as being the biggest reason why the depression went so deep and lasted so long.
Even a liberal economist like John Kenneth Galbraith described the actions of the Federal Reserve in response to the 1929 crash as "shockingly incompetent." Neither Republican President Herbert Hoover or his Democratic successor Franklin D. Roosevelt had a clue about economics or a policy that made any sense.
Both sought to keep prices -- including wages -- up, despite the fact that the money supply had declined by one third. How was the country supposed to buy all the output at existing prices, and employ all the workers at existing wages, when there was so much less money?
One of Herbert Hoover's biographers said aptly that he was a great man but not a great president. Anyone who doubts his greatness should study the history of his massive program to feed starving people in Europe during and after the First World War.
Most people would have raised the money first and then bought the food, but Hoover realized that people would be dying while he was raising money. So he risked his own personal fortune by buying the food first, hoping to raise enough money later from donations to recover all the millions of dollars it would take to pay for the food. It worked out in the end, but it didn't have to.
Had Hoover never become president, he would have gone down in history as simply one of the great humanitarians of the 20th century. As it was, he was demonized politically for decades as the calloused president who refused to take responsibility to help those ruined by the depression.
In reality, it was Hoover -- not FDR -- who became the first president to throw the power of the federal government into the effort to get the country out of a depression. In recent years, it has become more widely acknowledged that Roosevelt's New Deal was essentially Hoover's policies raised to the next exponent, spending on a more lavish scale and saddling the country with counterproductive programs that have lasted into the next century.
The fact that the first government efforts to get the country out of a depression -- by both Hoover and FDR -- were followed by the longest depression in our history has also not been lost on some. Quite aside from the specific harm done by specific programs, the general uncertainty generated by unpredictable government interventions made investors reluctant to make the long-term commitments needed to generate more jobs, more output, and more purchasing power.
Not only the Federal Reserve and two presidents managed to make the Great Depression worse, so did Congress. When it passed the Hawley-Smoot tariff of 1930, it contributed to a worldwide contraction in international trade, as country after country tried to "save jobs" by protectionism.
The notion that the stock market crash of 1929 caused the Great Depression that ravaged the 1930s has long been popular on the left, since this blames capitalism and casts government in the role of rescuer of the economy. However, Professor Peter Temin of MIT has pointed out that in 1987 the "stock market fell almost exactly the same amount on almost exactly the same days of the year" -- and there was no depression.
The Reagan administration was not the New Deal. The economy kept on growing.
This year's scandals and stock market collapse could not have come at a worse time, with an election coming up and no other big issues around for politicians to use. It is also worth noting that there are only two economists in Congress and hundreds of lawyers, ready to say and do whatever will look good and feel good at the moment.
If Congress passes laws that put corporate crooks behind bars for a long time, that is fine. But if it passes laws that will enable politicians to micro-manage businesses, that is a proven formula for big economic problems for a long time to come.