Great Depression II?

I want to start this post by claiming that I am, in fact, an optimist in spite of the negative tone of many of my posts. When I look at the glass it is more than half full with really clean, refreshing water.  But, sometimes when the water is actually muddy you have to acknowledge it.  We do seem to be in one of those “muddy” economic periods right now.

I am also not a Krugman groupie.  But, again, when a guy has been amazingly accurate in his predictions, has recently won the Nobel Prize, and is an expert on the Great Depression and recently updated his book on the subject to reflect the current environment, then it I at least want to pay attention to what he is saying.

Krugman’s latest column in the NY Times is another one to take notice of.  Here are some excerpts, I encourage you to read the column.

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.

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.

Krugman goes on to postulate that monetary policy is not enough – that the Fed, in fact, cannot stop GDII no matter how hard they try.  The only thing that can stop GDII is immediate, large scale stimulus in the form of spending.  Unfortunately, according to Krugman, politics is already getting in the way of this.

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.

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.

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?

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