> A new Great Depression? It's different this time > Fear is spreading with the financial system in disarray. But the global boom > is ongoing, unemployment is low and the government has new tools to address > the downturn.
> By Michael A. Hiltzik / Los Angeles Times Staff Writer / March 20, 2008 > http://www.latimes.com/business/la-fi-depression20mar20,1,832563.story > Dysfunctional capital markets, frantic central banks, stressed-out consumers, > fear and uncertainty -- all are alarming echoes of the global economic > cataclysm of the 1930s. > Which raises the inevitable question: Could another Great Depression be > lurking over the horizon? >... Many economists believe that the U.S. will find it almost impossible to avert a recession, if one has not started already. Housing remains mired in a deep slump,with some analysts projecting that Southern California home values could plunge 40% from their peaks last year.The Commerce Department reported this week that new residential building permits nationwide plummeted 36.5% in February from a year earlier. >... But there are vast differences between the 1930s and today. U.S. unemployment reached 25% during the Depression; last month it was reported at 4.8%. The international industrial economy was a shambles in the '30s. Today it is coming off a global boom.< Comparing one cyclical peak to another cyclical trough is the worst sophism ... or maybe it's simple stupidity. If you want to compare the present to the past, the comparison would be to 1929 or perhaps 1930. > "I've been asked many times whether we will have another Great Depression," > said David M. Kennedy, a Stanford University history professor and the author > of "Freedom From Fear," a Pulitzer Prize-winning history of the Depression > and World War II. "My standard answer is that we won't have that one again -- > I'd be surprised to have one of that seriousness and duration. But that > doesn't mean we wouldn't have a catastrophe we haven't seen before."< Good point! we might see a "supply-side" disaster arising from global warming. > Economists and historians say the most important difference between today's > economic environment and the old days is the government's role.< Well, there's a slap at the Austrian and other _laissez-faire_ types! >"There's a perception now that you don't stand around at the central bank and whack people with a ruler for making bad decisions," said Robert Brusca, chief economist at New York-based Fact and Opinion Economics. "Instead, you do something." > Nothing demonstrates that as vividly as the Fed's orchestration of the > takeover of Bear Stearns by JPMorgan Chase & Co. over the weekend. The deal > staved off a possible Bear bankruptcy, which the central bank feared might > traumatize financial systems worldwide. > The resolution drew a stark contrast with the Fed's role in the 1930 collapse > of the Bank of the United States, a New York institution largely serving > Jewish immigrants. The failure was then the largest in U.S. history, and the > Fed's inability to arrange a rescue by Wall Street banks -- including J.P. > Morgan & Co., the predecessor to the "white knight" in the Bear Stearns case > -- caused a cataclysmic loss of confidence in the entire national banking > system. That fueled a panic that historians regard as a key cause of the > Depression...< It should be remembered that back in the early 1930s, the Fed's attitude was summarized by the statement of the Treasury Secretary, Andrew Mellon: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." (Back then, the Treasury Secretary was on the Fed's board.) The idea was that "nature should take its course": the market was interpreted as a natural phenomenon, so that if we just let the market economy do its thing, all will be for the best in this best of possible worlds. It's quite possible that the Powers That Be have broken with such attitudes. Bernanke surely has. Also at the time, many of the reserve banks (the bank-owned pillars of the Federal Reserve system) objected to the idea of lowering interest rates, which the Fed engineered using what was a new tool at the time (Open Market Operations). The problem, it seems, was that banks weren't making any profits from loans, but instead from their holdings of bonds. As interest rates fell, therefore, the banks' incomes fell. Thus, the objections. The objections won. It's quite possible that bankers are less short-sighted nowadays. Also, the U.S. was committed to the gold standard back then. That meant that every time the dollar threatened to fall, the Fed had to raise interest rates, making recession worse. Now, we have floating exchange rates. Occupied with the problems of domestic recession, the Fed is likely to let the dollar continue its fall. That stimulates the U.S. economy by stealing demand away from other economies. The recession gets broadcast to the rest of the world. It's interesting that Hiltzik does not mention the role of fiscal policy, e.g., the way in which increased military spending might moderate the recession. This reflects the hangover of "love the Fed" attitudes that led people to put Greenspan on a pedestal. I think it's possible -- indeed likely -- that the U.S. avoid a replay of the Great Depression. But it's going to be hard times for quite awhile. Of course, these hard times should be seen as an extension of what's been hitting the poor and working classes for the last 25 years or so. It's an extension in two ways: (1) larger numbers of bankruptcies, foreclosures, and the like for the majority and (2) the extension of hard times to many in the economic elite, such as those who owned Bear Stearns stock last year. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
