Okay, I take it back. I know that I said that talk of a Great Depression was a ridiculous scare tactic by President Bush to get his bailout through Congress. But. I was wrong.

I don't see it as a scare tactic, because we are in the deflation phase of the giant, super-sized bubble that had lots of little bubbles off the sides. We've been trashing our manufacturing base to fund our new aristocracy; having the house of cards collapse leaves us in quite a pickle.

It is not that anything about the current economic situation can plausibly lead to ten years of double-digit unemployment.

Except the steady drip drip drip destruction of the manufacturing base, and the drip drip drip misallocation of support to the big bubble.

I have always said that we do not have to worry about another Great Depression because we know how to get out of one now. (it's simple -- spend money.)

My problem with this argument is that it doesn't work. We don't have great depressions anymore, we have bright depressions, that go on and on and on. Real estate crash in Japan: ugly depression. Stock market crash in '29. Ugly depression. Etc.

It looks to me that you get the effects of a crash no matter what road you take to fix it; Keynes prescriptions have mostly worked as a palliative, which is less bad than the alternative. (The exception to that is WWII, but that involved a great deal of destruction. Blowing up the world is not an acceptable option at this point.)

So, it looks like an unsolved problem to me. As are crashes, actually. You can smooth/warp/distort/banish the business cycle, but the business cycle eventually comes to see you.

max
['And it usually isn't a friendly visit.']

I watched you on CSPAN tonight, I have to say I liked what I heard, you were exactly right.

I read an interesting story right after I finished watching your show. It was posted on Reuters. http://www.reuters.com/article/topNews/idUSTRE4987TJ20081009
It seems we can change policy.

"it's simple -- spend money"

But that's what everybody has been doing all along. That's what got us into this mess. Why should it get us out? It is frustrating how everybody seems to have gotten into denial mode. Think about it. It's like "all we need to win in Iraq is more troops." Now it is "all we need to get out of the crisis is more borrowing, more consumption and more tax cuts". It's lunacy.

Tax increases make no sense, for the middle class. However, obtaining money from raising taxes on the wealthy makes perfect sense. They have the money we need and no one else. They've made fabulous sums of money while the rest of us have languished. They need to pony up and fix this country that has made them rich.

Part 2: If leveraging creates money, does the current deleveraging destroy money?

Further, we know the point that banks are deleveraging to, can't we use that information to determine how much money is being destroyed and at what point equilibrium will be achieved?

Can't we use that information to determine how much cash is required to provide liquidity, instead of pulling a number like $700 billion from thin air?

Credit is strange business.
I buy with cash yet every purchase has 10% hidden tax of credit cards.
So I am suppose to be happy about it because it provides jobs for bankers.

People don't want to pay taxes so
municipalities borrow money by collateralize their infrastructures. essentially another form of passing the buck to next generation.

In 5 years you won't have to worry about depression because Mexico will stop exporting their oil because of depletion.

In order to mitigate Peak Oil, US needed to have 30 year head start. Too bad no one listened to Jimmy Carter.

Part 2,

Basically US System has 70 year cycle. So the progressive only get in power after the capitalist have destroyed themselves.

But this time US is not the largest holder of Oil as it was in 1930s. But you guys can start another war but that just means that you are in the same track as England was trying to hold off other competitors.

Thanks for the link Joesph, about the Sheriff refusing to evict people. It shows how everyday ordinary people need to hold themselves accountable and realise that they can change things. If they refuse to participate in a unfair and unjust system they can and really change things. Post Vietnam era people have forgotten what civil disobedience is, to quote Howard Zinn "the problem is civil obedience"

Dean boy, it is time for the hand of history to step in. I heard you on the September 30th Diane Rhem show, and you were, in your half baked way, somewhat correct then. You shoved it in the media's noses like Peel used to do during the great Corn Law debates! That was back when we used to have real crisises. Not this paper chase that will recover. You Americans have gotten soft in the belly!

"So the progressive only get in power after the capitalist have destroyed themselves." Not to nit-pick but...

Why don't we say--'so the progressives only get in power after the onservatives have destoryed themselves...'
The reason is purely based on framing and its influence on debate and dialogue. In the many discussions I have down here in GA with conservatives I have to say that I have no idea what a Capitalist is when they use the term, same with socialist. When you try to pin it on them they evade and attack your patriotism or some other authoritarian scare tactic. As chairman of a county party, I have democrats who are truly scared of letting their neighbors know, and will volunteer for things as long as it doesn't possibly expose them to being found out. I'm dead serious.

The point is I get what they mean with these words in a theoretical sense, but thats theory and we should keep it to the Ivory tower. But when we are discussing policy we should stick to accurate representation of who and what policies we will see in reality. As well as what policies are being offered up.

Its how you get the "socialist" comment from yesterday's McCain rally... or the "i'm not answering the question you ask me" in the vp debate.

I'm seeing a lot of scratching heads out their online as if these people are just using it to win the election. I always welcome you to come down here to Henry County GA to find out. They mean it, they really think Obama is going to destory this country, that Democrats and liberals are the plauge. These are good people who are scared and undereducated. The economy has stopped working for them, and they lash out on race, illegals, gays--whatever you can find.

But in my expereince, and I've learned it from this blog in regards to "free trade," the first place to start a debate/critique/commentary on conservatives vs. progressives is to not give them their comfort terms.

Comfort terms, like comfort food, make depressed people feel good by evading reality. Free trade, free markets, captialism, socialism, bias in the classroom, intellegent design, media bias... you name it.

You see a lot of pathology down here. But it comes out as anger and incoherent political persuasions. Even Democrats I know talk about buying up guns for when this financial crisis causes mass chaos.

We're detached from reality down here and it starts with language usage, and precision of terminology.

It is interesting that the NBC guys (the late Russert and now Brokaw) are the ones pushing balanced budget and SS is broke. Does NBC hire members of an odd economics cult? or is this handed down from the Big Bosses at GE?

Its not just NBC, its the whole Village mentality among the Washington - New York media elite (socially liberal, economically conservative, and whose cognitive functions have been corrupted by thirty years conservative PR, framing, and narratives (see Bob Somerby's "The Daily Howler" for how to get detoxified.) These guys, their friends at the Washington Post and the other networks, really do believe the country will be saved by gutting social security and medicare to "balance the budget" (although there is always enough money for wars).

When I'm trying to convince people that there is a way out of the nightmare, I don't use the phrase "spend money" b/c it triggers their lizard brains to panic. I talk about investing in America. So when I say that we should - in the immediate term - increase UI benefits and food stamps, I talk about how that investment of our tax dollars will yield the biggest return in terms of boosting the economy (consumer spending). Helping the less fortunate will help us all, something for something, return on investment. It's still a very hard argument to make after 30 years of policies that demonize the poor and lower middle class but it taps self-interest, which is always the way to go.

Dean,

I tip my cap to your frank and commendable writing.

Surely these are interesting times.

"It is not that anything about the current economic situation can plausibly lead to ten years of double-digit unemployment."

That statement is purely rhetoric, Dean, and I think you shouldn't try rhetoric tricks. You are not a politician. Your job is to tell the truth, and the truth is that you don't know any better than Roubini or Paulson (to arbitrarily pick a few names) how likely a deep recession is at this point. The claim that "we know how to get out of a Great Depression" is, I am sorry, ludicrous. We know nothing, and the mess we are in now is partly a result of our know-nothing economics. Greenspan was a hero yesterday, among conservatives as well as liberals. Over night he became a villain yet he was just another guy who was sure he knew how to avoid, or get out of a recesion ("it's simple - spend money").

I am waiting for the moment when a rational discussion about the economy will finally be possible, but this will likely only happen when the remaining illusions are shattered.

Let me try an example. The US auto industry is bankrupt. There are several reasons for this, some of which have to do with specific mismanagament. But does it ever occur to economists that there might be a point at which people simply don't need any more cars because they already have more than enough? This is the situation in the US. The last couple years, people have been cars - horrible, inefficient models at that - just because they could and credit was cheap and their culture told them that buying cars is what they needed to do. But this couldn't go on forever. There had to be a point at which reality kicks in, and the laws of physics trump cultural fashions. Your slogan "spend money" - exactly the advice Bush has been giving (and following) since 9/11 - is just an expression of the attempt to negate physics by claiming it ain't so. Economics is the ultimate postmodernism, more divorced from reality than any poststructuralism ever was.

piglet,

I think Dean's point is that we've learned a couple things from the great depression:

- Don't be Hoover and wait to take action
- Keynesian stimulus is a must to avoid deflation

But that's more what NOT to do, than what needs to be done.

It's not that we need rampant consumerism, but the GOVT needs to spend (yes, even with a $N brazillion national debt) in order to "prime the pump" and stem the coming deflation.

I completely agree with your assessment of American's spending habits as someone who has been working "against the grain", saving 10% of my takehome pay, and NOT buying things I don't need (most importantly a bubble-inflated house).

Hey, there's a big difference between spending money to enable people to oh, buy food and housing and the other necessities of life, and allowing people to spend money trading whatever kinds of securities they all were trading for the last 10 years or so.

The big problem with the kind of spending that was going on is that it encouraged to rich to strip the non-rich of the last remaining asset they had--one equity loan at a time.

Dean Baker:

"It is not that anything about the current economic situation can plausibly lead to ten years of double-digit unemployment."

piglet

That statement is purely rhetoric, Dean, and I think you shouldn't try rhetoric tricks. You are not a politician. Your job is to tell the truth, and the truth is that you don't know any better than Roubini or Paulson (to arbitrarily pick a few names) how likely a deep recession is at this point.

This is a very pure example of non sequiter. A Depression is not "a very deep recession". Its a recession where the formation of new effective demand goes off the rails and stays off the rails for an extended period of time.

Precisely as Dean says, there is nothing about the current economic situation that would prevent the action necessary to avoid a decade of double digit unemployment. The sole risk of a Depression at this point is the risk that government would elect to amplify the problem rather than address it.

In another two or three decades, depending on where we are in terms of Peak Oil and whether the US has addressed its structural import dependency, maybe.

... signed,

Dean,

The danger in being right often, is that it makes one think that you are right all the time...

...this time I think not.

Because history is not an ellipse, where we are simply retracing the trajectory of our forebearers.

The linear displacement of our circular path ensures that each new generation will face with a unique time space.

In fact, I would argue that some of the crisis relates to us using some of the same light scafolding tools you suggest...while ignoring those tools that form the solid foundations of buildings meant to stand through time.

But is all spending equal? Are all tax cuts/increases equal?

It seems to me if you take $1M out of the hands of a Wall Street fat cat and create 20 $50K-a-year jobs (teachers, police, firefighters, road construction) the government the economy, and the infrastructure is going to benefit more than allowing that fat cat to keep that money floating around in various paper investments. Those 20 jobs will not only get some of the money into government coffers (most importantly those of state and local government), but the take-home portion of the money will end up almost 100% back into the wider economy not just into stock investments for companies whose values are more likely to increase by cutting jobs rather than creating them.

Dear Dean Baker

I've been studying the "credit default swaps" market for some time. It is said that there are $58 trillion of these outstanding. Though some are off setting many may be built on leverage and unreserved.

What will happen as a result of the Lehman auction today and similar events is that those solid institutions that underwrote CDS contracts which they than turned around and hedged with an off-setting CDO will still be obligated contractually for the CDO they underwrote while losing their protection to a bankrupt counter-party. They will than have unhedged exposure and may be taken down by the same bankruptcy or another depending on whom they underwrote. A few major bankruptcies will take down the whole $58 trillion edifice like a "house of cards."

The only way to resolve this is for the U.S. government to declare "force majeure" and annul these contracts. Parties will be relatively little scathed financially as they will lose only the premium flow and un-callable protection where they have underlying securities to protect.

An Economist

Spending cuts would not make much sense (except for the military), however tax increases would. Remember the "soak-the-rich" tax hike of 1935? That took place at the height of the Depression, yet conditions got better, not worse, after it.

Piglet,

Liberals loved Greenspan? Not this one. Ever.

i am no economist but i think Dean is right. a country with the resources of the United States has no business going into a Depression where people don't have enough to eat or a place to live.

if absolutely necessary the government can take over the functions of providing loans for honest enterprise, and indeed managing the food and housing supply.

this need not lead to permanent Socialism. if the government role is kept at the level of facilitation and managing, and priming, flows, it won't take very long for private enterprises to become very interested in bidding to buy out the government "buisiness."

but we would need to be more careful not to fall into the same privatization trap that we have been incrasingly mired in since 1980 and especially since the team of Bush looters took over the country.

here is hint about that: front page of the Portland Oregonian today is assuring its readers that the current economic turmoil will force the government to cut Social Security pensions or raise the retirement age.

there is no such connection in logic or finance... but the people who lie to you on a daily basis can get you to stand by while they do it do you anyway.

What if the economy slows for a year or two, and then as things start to pick up the price of oil goes through the roof?

What did it take to get $150/bbl oil? What will it take after Gawar, the North Sea, Alaska's North Slope, and Mexico's fields suffer a few more years of decline?

Interesting comments. Maybe a financial meltdown is exactly what we needed to get people talking... or at least it was needed to get me to start reading people's comments.

I also somehow got lucky in making what i think is a funny youtube video... faces of sad traders played to merle haggard/willie nelson's half a man.

http://www.youtube.com/watch?v=hLBsPkLYD7

Economic Neophyte here. Unavoidably tuned in to some right-wing Christian Monetary radio show (Crown Financial Ministries, I think) without being able to change the station, it was stated that China, other countries are in the process of looking for some other currency, and if ever they called in their investment in our system, some very troubling financial times lay ahead. Any truth to this? As I mentioned at the top of the post, I know very little about the actual functioning of the economy, though would love to learn more.

Stop Dreaming Start Action

the liberal Democrat who ran against Mitch for governor in 2008, wants to challenge Bayh in the primary. Those of you who are itching to help fund a serious progressive primary challenger against him should email her and let her know that, or maybe even set up a website devoted to drafting her to do it. I think she will if she sees that the support is there.