This "Third Depression" Could and Should Have Been Avoided

Paul Krugman is out with his latest editorial, and things aren't looking good.

While reading his piece, "The Third Depression," all I kept thinking about was how Paul, and most other serious economists, were calling for a much larger stimulus back in late 2008/early 2009, that focused on stimulating the economy by creating jobs, jobs, jobs. Not cutting taxes.

The Great depression and F.D.R.'s handling of it - and the subsequent lost year in 1937 when conservatives got him to cut spending -- was referred too ad nauseum in articles such as "The "FDR Failed" Myth" (also see here), with the hope that the newly elected Obama Administration would take heed.

Paul even wrote the new President: A Letter to the new president. What Obama must do.

The last president to face a similar mess was Franklin Delano Roosevelt, and you can learn a lot from his example. That doesn't mean, however, that you should do everything FDR did. On the contrary, you have to take care to emulate his successes, but avoid repeating his mistakes.

About those successes: The way FDR dealt with his own era's financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system. In particular, the Reconstruction Finance Corporation initially played a role similar to that of the Bush administration's Troubled Assets Relief Program (the $700 billion program everyone knows about). Like the TARP, the RFC bulked up the cash position of troubled banks by using public funds to buy up stock in those banks.

There was, however, a big difference between FDR's approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn't shy about demanding that the public's money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington. Beyond that, the New Deal went out and lent a lot of money directly to businesses, to home buyers and to people who already owned homes, helping them restructure their mortgages so they could stay in their houses.

Can you do anything like that today? Yes, you can. The Bush administration may have refused to attach any strings to the aid it has provided to financial firms, but you can change all that. If banks need federal funds to survive, provide them - but demand that the banks do their part by lending those funds out to the rest of the economy. Provide more help to homeowners. Use Fannie Mae and Freddie Mac, the home-lending agencies, to pass the government's low borrowing costs on to qualified home buyers. (Fannie and Freddie were seized by federal regulators in September, but the Bush administration, bizarrely, has kept their borrowing costs high by refusing to declare that their bonds are backed by the full faith and credit of the taxpayer.)


President Obama didn't take heed.

After two years of watching this President, it's become clear that his modus operandi -- as we saw with the Health Reform Bill when he didn't really fight for the Public Option (the only true means of stemming health insurance costs) -- is to take the path of least resistance when he should be going BIG.

Let's not forget that at the time in question, he had a 71% approval rating and could have gotten what he wanted without much more effort than he was already expending.

But, rather than go for a stimulus package in the higher end of what Krugman and economists were calling for -- $1.5 to $2 trillion -- Obama chose their minimum figure of $800 billion. He went small.

Rather than make the plan already low-balled plan be 100% job creation in nature, nearly 35% of the that minimum was wasted on tax cuts which he knew going into it would do absolutely nothing to stimulate the economy, & it didn't even win over the GOP.

Where FDR "Welcomed Their Hate," Obama gave in to it.

In 2009, after being pounded by Krugman for the size and scope of the stimulus, President Obama dismissively said that ‘If Paul Krugman has a good idea…then we’re going to do it.’

Krugman did. The Obama administration didn't. And we now know that Paul Krugman was right.

Now we are faced with the fallout of those earlier decisions. The stimulus stopped the economic free-fall the country was in, but it didn't thrust us into a strong recovery either.

Going back to the stimulus well now -- with the GOP playing obstructionists in ways never seen before in the history of this country -- is impossible, especially with the handful of Consevadems like Ben Nelson, Blanche Lincoln & Evan Bayh, holding the door for these Hoover-esque obstructionists.

And as you can see from Paul Krugman's latest piece, he believes we are now actually in a "Third Depression":

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.


In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.


As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.


And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.


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