A Third Depression?

Watching the real estate market as it continues to shrivel and waves of foreclosures force an ever downward pressure on home prices, I cannot help but believe that Paul Krugman may not be onto something with his prediction that we may be headed for a third depression - that's right depression with a "D" rather than a recession. Until real estate pulls out of its multi-year nose dive, I do not expect the economy to truly pick up and more and more Americans will be faced with the grim prospect of merely holding on financially. Already, with the Republicans blocking an extension of unemployment benefits many Americans will be facing utter desperation. Here are highlights from Krugman's latest column in the New York Times as to why he believes that the economic picture is grim and why it could have been avoided:

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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.

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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.

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And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

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[T]he recession brought on by the financial crisis arguably ended last summer. But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

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[O]fficials [in Europe] 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.

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[W]hile long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating. . . . . It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times. 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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Needless to say, the GOP is driving this train wreck after having spent like a drunken sailor under the Chimperator. As for the pain of the unemployed? I suspect most of the GOP leadership and their Christo-fascist allies simply do not care. They always prefer to blame the victims rather than their own failed policies.