A second Great Depression is still possible

[AllentownJake]

By Thomas Palley

Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.

The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme.

That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.

As for mainstream economists, their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the models. According to mainstream theory, it is assumed that full employment is a gravity point to which the economy is pulled back.

http://blogs.ft.com/economistsforum/2009/10/a-second-great-depression-is-still-possible/

[cliffordu]

1. And probable too, if there isn't something done to fix the 'jobless recovery'

with some fucking jobs.

[AllentownJake]

2. That's pretty much it

Can't have a consumer economy with no consumers and the people that are working under an enormous debt and tax burden.

[cliffordu]

4. IIRC, the only countries that didn't have manufacturing bases in my chilhood

were countries that had no middle class....just the uberrich rulers and the peasants......


If some real level of manufacturing doesn't happen again in this country pretty soon, we all better learn self-dentistry.

Can't run an economy on an international three card monte game forever.

[AllentownJake]

7. Most of our wealth right now exists in one place

On a servers held by the brokerage firms and the banks.

30 years ago we fell in love with the stock market without realizing that all it is, is a casino. It provides no wealth.

As such over the past 30 years people have begun to confuse the wealth of the nation with the stock market.

No factories producing goods, no wealth. That simple.

[Captain Hilts]

3. The Financial Times is just a left wing rag!!! Oh, wait, no it isn't...

[Democrats_win]

5. We are living in the bush depression: tent cities, homelessness, few jobs.

What's remarkable is that bush was the biggest Keynesian in American history. First he had his homeland security spending and then the war spending. Then add in his tax cuts and we have a massive case of deficit spending. Add in the monetary-caused housing bubble and the bush presidency far exceeds anything in American history except for World War two. After all that, the top-heavy bush economy sank. Like alcoholism, you've got to first admit that you have the disease. It's the bush depression, stupid!

[bvar22]

29. Not really fair to blame just Bush.

He just happened to be riding the Free Market horse when it finally collapsed.

[Ruby the Liberal]

33. I blame Clinton, actually. The repeal of Glass-Steagall

not only happened on his watch, but he was an active cheerleader for it.

That and NAFTA set the stage for the collapse.

Bush just accelerated it with his lunatic administration.

[debbierlus]

6. Possible? Extremely likely.

We didn't fix the banking system, we made it bigger and more powerful and allowed them to continue on with the exact policies that got us into this mess in the first place.

We are hemorrhaging jobs.

We ain't seen NOTHING yet.

[AllentownJake]

9. TARP will go down as one of the darkest days in American History

and both political parties are responsible for taking an evil giant that was on its and picking it back up to terrorize the citizens some more before the next collapse.

[bvar22]

25. !

NOW we have Your Children’s Money too !!!
And there is not a fucking thing you can do about it!
Now THIS is “bi-partisanship”!
Better get used to it!!
Hahahahahahahahaha!


"But it saved the economy!"

No, it only enriched the Wall Street Bankers and kept the rigged game going.
So much for "The Invisible Hand of the Marketplace".

[LuvNewcastle]

10. I agree.

We're going to have to put some new regulations in place before we even begin to get out of this mess.

[ProSense]

8. Ah, the pessimist

Taste the optimism

[AllentownJake]

11. The author of the article has points

If you care to refute the points of the article that is fine otherwise I'm ignoring your replies.

[ProSense]

16. Not only is the article linked to a direct refutation of the OP, but

the authors of that piece are stuck making comparisons based on old models and industries. They aren't considering that things are changing, as the article I linked to demonstrates. They aren't considering that Kerry-Boxer will create millions of new jobs. It also doesn't take into consideration the impact of health care reform and financial regulatory reform.

[AllentownJake]

18. Did you even read the article I posted

or did you read the first three paragraphs.

[ProSense]

20. Yes, and I just countered the nonsense.n/t

[AllentownJake]

22. No you didn't

You cited a whole bunch of legislation that hasn't even left committee as "job creators." You posted an article about one project that is being tested in Lackawana, New York as evidence that the concerns the author of this article puts out there are bunk.

You addressed absolutely nothing, you linked to an article that was totally unrelated to the topics discussed in the article and brought up phantom legislation that hasn't even been opened up to committee hearings for debate.

The article didn't say there would be a second great depression, it said it is a possibility and here is why. You addressed those real problems with nothing.

[AllentownJake]

21. I want to add

That you have just spouted a whole bunch of nonsense citing legislation that hasn't even left committee with the hopes that these phantom pieces of legislation will create jobs. Most of these pieces of legislation you cite, haven't even had initial plans submitted to the committee for consideration and amendment, and after the Health Care debacle of the past 7 months, the idea that this legislation is going to pass in any form or substance of what it currently looks like.

You claim to be debating facts, but you are using as the basis of your argument, legislation that doesn't even exist.

[bvar22]

30. Par for the course for that poster.

...especially inserting links that go to articles that have absolutely NOTHING to do with the topic.

[AllentownJake]

31. The Sarah Palin of DU

[karynnj]

17. There are indirect ways to counter articles

The fact is that the what will be a healthy economy in the future will not look like what a healthy economy did earlier.

The fact is that there is no reason to nitpick where you disagree the article. I reject the framework of the article.

[AllentownJake]

19. What are you talking about

"I reject the framework of the article"

The article made several points

Housing prices underwater
Household and Business bankruptcies
Expiring Unemployment Insurance
Public Sector joining the Private Sector in job contraction
Trade Deficits
Off-shoring of jobs
Failure of Cash for Clunkers

From the last paragraph

The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real possibility.

[karynnj]

23. The problem is that this is cherry picked - almost as much as Bush's intelligence reports

It ignores all of the things that are beginning to look better. In addition, the Cash for Clunkers program was not a failure by most analyses. It did remove some inefficient cars from the highways. The fact that it "ate" some of the sales that might have happened in the next month was predicable, but it did have a stimulative impact.

The fact is that the job losses, while high, were lower than in previous months - they are decreasing and jobs are usually a lagging indicator. It ignores that retail sales were actually higher than expected in the latest report. All of these things are the "green shoots" he mocked.

I will use the complicated last sentence to show how there are different ways to to get a less gloomy impression. The reason there had to be "unparalleled deleveraging" is because there was unsustainable unparalleled leveraging that led to this crisis. Some of the "wealth" that appeared to exist in mid 2008 was a bubble, not real, and it is not coming back. It is true that people who lost wealth as the bubble burst will spend less, thus cutting the income of all the small businessmen they purchase things from. (starting the multiplier effect). However, people saw those losses in September, 2008 through about March, 2009. Since March, they saw their 401s improve.

A more optimistic view might be that the initial response by wealthy and upper class people who lost money was an over reaction. Many people really quickly stopped spending shocked by the losses. As some value has been regained by their 401ks, many seem to tentatively be spending again, less profligately than in the 1990s/pre-2008 2000s, but more than in the first half of the year. I suspect this based on the fact that, at least in NY and NJ, the malls are not the near deserted place they were in the first half of the year. The retail sales numbers indication that this personal observation was not a fluke.

What this means is that as the ripples from the lower spending, hit people with small business etc in the first half of the year, for many services, the demand has started to return. That spending INCREASE has its multiplier too - and as it is very needed money, it will likely quickly be spent. This is, in fact, moving AGAINST the economic spiral spoken of in the article.

Now, I don't think we will get back to where we were before the bust for years, but I think a case can be made that we will at least plateau where we are - if nothing were done. But, somethings are being done. A huge amount of the stimulus has not yet been spent and, as Prosense's article shows, there are companies starting up and they are producing something. These things make me think that we will not have another steep decline.

(Now before you say it - I concentrated on the wealthy and teh upper middle class becasue of the content in the last paragraph. The reason was to counter the multiplier effect argument.)

It also ignores that there are fewer foreclosures, partially because about half in danger of it are being modified.

[AllentownJake]

27. The author was arguing double dip

He wasn't arguing that things would not get better. He was arguing things get better but certain fundamentals cause the economy to go back down. So I'm not going to argue you on the points you've made about an appearance of an economic recovery. He said it was a possibility. That some of the fundamentals of our economy in 2009 are different from previous recessions.

I neither disagree or agree with the author's premise. I think it is a real possibility with a continued 9-10% unemployment. Particularly after unemployment benefits expire and people don't replace that with income or accept underemployment. I believe a jobless recovery in a consumer based economy is dangerous and long term unemployment for a significant amount of the country is enough to bring down the rest of the sectors. Particularly with the United States lack of a social safety net that exist in the economies of Europe. People out of jobs, with no unemployment, and no income cannot have their mortgages modified.

The lower dollar could counter his trade deficit fears, however gains in a lower dollar can be wiped out by an increase in the amount of dollars required to purchase oil, which has an inflationary effect on all other sectors of the economy.

Public Sector employment is going to continue to contract as states are forced to lay off workers due to decreasing tax revenues.

On Cash for Clunkers. When 8 out of 10 of the cars are not made in the USA and the profit is absorbed by a foreign corporation, it is hard to argue that the program was successful. We helped out Japan and Korea with their US inventory problems.

[karynnj]

34. A large number of those "foreign cars" are manufactored here

[RT Atlanta]

12. +1

Play the hand we're dealt and turn those lemons into lemonade!

[AllentownJake]

14. If you care to refute the author of the articles points

That is great, I'd love to hear it. Otherwise you are just repeating slogans my mother said to me when I was 6. These are adult problems, not issues that have solutions that can be summed up on bumper stickers.

[glitch]

24. Ah, the optimist

http://www.democracynow.org/2009/10/13/author_barbara_ehrenreich_on_bright_sided

[ProSense]

28. Ah, the pessimist

Roubini Sees ‘Light at End of Tunnel’ of Recession

Even the most pessimistic economist on the planet is more optimistic than the pessimist here, but what does he know?

[brentspeak]

13. The idiot business economists who yesterday decreed the recession "over" were unintentionally right

The recession is over; the depression is just beginning.

[AllentownJake]

15. It might be over, it might not be

The author of this article brings up relevant points about job losses, over-extended consumers, and people underwater in their mortgages. With these issues, the traditional economic models the economist are relying on maybe as accurate as the models they were using in 2006 before the crisis.

[tonysam]

26. The problem is structural

The U.S. Congress is going to have to repeal the past thirty years of economic policies which have forced this country to the brink of ruin. This includes repealing deregulation of key industries, putting in tariffs, taxing the hell out of the top 1 percent (especially the billionaires and megamillionaires), and putting incentives for companies to bring manufacturing and much of service industries back to this country.

Anything else is pure folly.

The problem, of course, is Congress's unwillingness to do what is necessary.

[AllentownJake]

32. What turn to the recipe that provided us stability, good jobs, and a high standard of living

Why the fuck would we do that.