It's a 1930's Depression Scenario

by bobswern


Mon Jun 15, 2009 at 02:15:49 AM PDT

It's as if a surreal, perfect storm of bad judgement with regard to our economy has enveloped Washington over the past few days. Reaffirming this, over the last 72 hours, the headlines have been popping up in the financial news websites, then disappearing, only to reappear again this morning--all at once. A clear picture of both what's about to be announced this week and next in Washington, as well as what's unfolding, worldwide, is quickly coming into view. And, many respected economic pundits, from Nobel laureate Paul Krugman, in today's NY Times (See: "Stay The Course"), to noted Nouriel Roubini minion Edward Harrison (See: "Is 2009 tracking a 1930 Great Depression scenario?") last night at Naked Capitalism, to Barry Eichengreen and Kevin O'Rourke at Europe's Centre for Economic Policy Research (CEPR) (See: "A Tale of Two Depressions") are virtually and concurrently reaching similar conclusions, and they're all pretty damn scary.
bobswern's diary :: ::
Here in the U.S., as Paul Krugman reminds us today, we're talking capitulation to the status quo, all dressed-up in spin about yet-to-be-legislated, "better regulatory oversight"--and we're becoming all too familiar with that semi-spineless end result demonstrated by our legislative branch in D.C.. As Krugman points out in this morning's "Stay The Course," 'It's 1930, all over again.'
(BTW, I don't know if it's just me, but I really don't think I've sensed Krugman being more upset than he is this morning.)


New York Times
Op-Ed Columnist
Stay the Course
By PAUL KRUGMAN
Published: June 14, 2009 Print Edition: June 15, 2009
The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it's déjà vu all over again -- literally.
Krugman reminds us that "...for the third time in history a major economy has found itself in a liquidity trap." He points out the traditional solutions, such as interest rate cuts, have reached their limit. So, the natural thing to do is to seek out and implement unconventional measures.


Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we'll do the same thing this time.
We then get a two-sentence history lesson from him, reminding us of how the economy grew rapidly from 1933 to 1937, hand-in-hand with FDR's New Deal policies. But, as Krugman reminds us, unemployment was still very severe. (A clear reference to what's occurring and projected, now and over the next couple of years, respectively.)

Krugman reminds us of the mistakes our government made at the time, when they "stopped worrying about depression and started worrying about inflation." F.D.R. sought to balance our budget, and the Fed turned the screws on monetary policy. But, the economy experienced a double-dip Depression at the time as a result. Full recovery wasn't attained until World War II.

Krugman then points out similar events relating to Japan in the 1990's, where they saw a partial recovery, but the leadership there made the same mistake of shifting their focus to mounting deficits, increased taxes and spending cuts; and, once again, Japan slipped back into a recession.

He points out that the exact same thing is happening now in the U.S.

Link

The Proof is in the GRAPHS:
HERE

The Federal Reserve will finish what they started.
WASHINGTON -- The Obama administration wants to overhaul the country's financial rule book by giving the Federal Reserve increased powers but, bowing to critics in Congress, is backing away from proposals to consolidate various regulatory agencies.

The administration's overhaul plan would make the Fed a systemic risk regulator to oversee large institutions whose failure could threaten the stability of the entire system. It also will create a council of regulators with broad coordination responsibility across the financial system, administration officials said.