THE CRISIS II, Surviving the Great Collapse
By Robert Kuttner
This economic crisis doesnâ€™t have to be a second Great Depression â€” if government does nearly everything right, and soon. But if government doesnâ€™t do more, and fast, this could be worse than the 1930s. Why? There are three big reasons:
Finance: A Doomsday Machine. The financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, there was a stock market bubble, mainly because people could play the market â€œon margin,â€ borrowing to invest in stocks. There were also scams like the original Mr. Ponziâ€™s. Like in the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules.
But today, thanks to â€œsecuritizationâ€ of loans and the ability of insiders to create exotic and unfathomable financial instruments, the speculative system makes buying stocks on margin look like childâ€™s play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do.
We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.
In 1929 when the stock market crashed, the banking system was relatively healthy. Bank customers played these speculative games and took the losses, not banks. This time, the banks drank their own Kool-aid.
Pakistan edges closer to the cliff While everyone fiddles Ending Americaâ€™s â€˜race to the bottomâ€™It took until the awful winter of 1932-â€™33 for the general depression to fully infect the banking system, and cause over 7,000 banks to fail. But Rooseveltâ€™s cure â€” deposit insurance and a temporary bank holiday to sort out good banks from bad â€” quickly got the financial system up and running again. Today, the banking mess is still dragging down the real economy, with no effective cure in sight.
Wealth, Deficits, and Demand. The economy now bears all the hallmarks of a depression. Between the housing collapse and the stock market crash, American households are out several trillion dollars (in the 1920s, there were no 401(k) plans and less than 2 percent of Americans owned stock).
When people are suddenly out a lot of money, they spend less. Weak demand in one sector is cascading into other sectors. People spend less on autos, air travel, hotels, restaurants, clothing â€” any optional purchase. Business sales and profits are down, which causes other layoffs, and the cycle deepens.
Roosevelt was said to be a big spender, but his biggest peacetime deficit was only about 6 percent of GDP. This year, the deficit will exceed 11 percent, and the recession will deepen all year. It took the truly massive deficits of World War II â€” nearly 30 percent of GDP â€” to finally end the Great Depression
A Debtor Nation. America in 1929 was a major international creditor. Today, the U.S. is the worldâ€™s biggest debtor. The financial bubble created the illusion of prosperity.
During the bubble years, the foreign borrowing disguised domestic weaknesses, such as our much-diminished manufacturing sector. For now, foreigners are still willing to lend us vast sums, but that may not continue indefinitely.
All these economic calamities have solutions, but each is more radical than whatâ€™s currently on offer. The government will have to temporarily nationalize major banks, sort out good assets from bad ones, and then return banks to responsible private ownership. To cure the housing collapse, government should directly refinance mortgages, rather than bribing banks to ease terms.
Deficits will have to be a lot larger before they can get smaller. That should not require a war; this is just as grave a national emergency. Those deficits could purchase much broader prosperity.
This crisis doesnâ€™t yet have a name. It has all the hallmarks of a depression, but people are understandably reluctant to use the D-word. So let me suggest one: The Great Collapse, since this was both a financial collapse and an ideological one.
Can America recover from a Great Collapse? Can we avert a second Great Depression? To coin a phrase, yes we can. But we need the right strategies and we donâ€™t have much time.
Robert Kuttner is co-editor of The American Prospect and author of â€œObamaâ€™s Challenge: Americaâ€™s Economic Crisis and the Power of a Transformative Presidency.â€
The Boston Globehttp://www.iht.com/articles/2009/03/12/opinion/edkuttner.php