Fighting Off Another Great Depression

Nobel Prize winning columnist Paul Krugman has another piece in the New York Times which ought to send shivers down everyone's back, including GOP members of Congress who seem Hell bent on torpedoing much need stimulus legislation. Unfortunately, signs are that Obama is seeking to placate them rather than hold them responsible for the mess in the first place. The reality is that we've played by the rules of the GOP and the Chimperator - which basically were that there are no rules and regulations - and the result has been disaster. We need prompt action, not playing nice with those who care nothing about most members of society. It appears to be a case of those who created the problem now blocking efforts to fix the problem. A case of Nero fiddling while Rome burns. Obama needs to get more backbone. Here are some column highlights which are not pretty:

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“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case. The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

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So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out. We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. . . . It turns out, however, that preventing depressions isn’t that easy after all. Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.

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John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy. But these plans may turn out to be a hard sell.

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In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years. More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.

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All of this leaves me concerned about the prospects for the Obama plan. I’m sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr. Obama is right: We really do need swift, bold action.

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Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going. So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?