Tuesday, November 25, 2008

It's Not 1929, But...

That doesn’t mean that we shouldn’t pay attention to history. I believe in a linear view of history where the future is undetermined, and not a wheel of endlessly repeating events with no possibility of “new” or any real meaning for “future.” Instead of discovering a pattern in the present that fits one in the past to understand where we are and are “determined” to go, our “lessons from history” must always be suggestive and not conclusive. For historical inquiry to be helpful in addressing issues in the present, we look for patterns in the past that were and weren’t helpful in their time with a view to creating something of value to humankind in the present. This is where I’m coming from. What about you?

As the financial crisis has unfolded over the last few months, the national attention has been drawn back to the advent of the Great Depression, epitomized by the
cover of Time Magazine in its November 24 issue with the image of Barack Obama embedded in a picture of FDR. There are significant parallels between 1929 and 2008; and there are equally significant differences. It is critical to distinguish between them.

In the rush (should we say “panic”) to see in our present that earlier period, Daniel Gross wrote a
serious article with a cute title, “Don’t Get Depressed, It’s Not 1929,” in which he points out some of the obvious differences between the periods.
The credit debacle of 2008 and the Great Depression may have similar origins: Both got going when financial crisis led to a reduction in consumer demand. But the two phenomena differ substantially… the economic trauma the nation suffered in the 1930s makes today's woes look like a flesh wound.

"By the afternoon of March 3, scarcely a bank in the country was open to do business," FDR said in his March 3, 1933 fireside chat… In 1933, some 4,000 commercial banks failed, causing depositors to take huge losses. (There was no FDIC back then.) The recession that started in August 1929 lasted for a grinding 43 months, during which unemployment soared to 25 percent and national income was cut in half. By contrast, through mid-November 2008, only 19 banks had failed. The Federal Reserve last week said it expects unemployment to top out at 7.6 percent in 2009. Economists surveyed by the Philadelphia Federal Reserve Bank believe the recession, which started in April 2008, will be over by next summer. (Of course, back in January the same guys forecast that the economy would grow nicely in 2008 and 2009.) But don't take it from me. Take it from this year's Nobel laureate in economics. "The world economy is not in depression," Paul Krugman writes in his just-reissued book The Return of Depression Economics. "It probably won't fall into depression, despite the magnitude of the current crisis (although I wish I was completely sure about that)."
Before you tell yourself not to be depressed about the prospect of depression because Paul Krugman has said that we are not in depression, consider that this Nobel Prize winning economist first wrote about a return to depression (not recession) economics, and he wrote it in 1999. As he looked at the economic crises that had swept across Asia and Latin America, he said that those crises were warning to us all, like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback.

Alas, with the Wall Street boom and financial wheeler-dealers making vast profits, the international crises of the 1990s faded from view. But as Krugman points out in an expanded work published this month titled,
The Return of Depression Economics and the Crisis of 2008, depression economics have come to America and that a replay of the 1930s seems all too possible. Against that backdrop, don’t take too many of Gross’ valium-coated assurances that since this isn’t 1929, we are not entering a depression.

What Gross and Krugman agree on, and what the Great Depression teaches us, is that time is of the essence. Last week, Krugman pointed out
There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.
The good news, said Gross, in his don’t-be-depressed article
After the 1929 crash, the nation had to wait more than three years for a president who simply wasn't up to the job to leave the scene. This time, we've got to wait only two more months.
If you listened to Obama’s radio address on Saturday (you can watch the 3.5 minute presentation on YouTube
here, and you can read the transcript here), or heard his press conferences yesterday and today, I think you will appreciate his sense of urgency. Obama is well aware of what happened in the 1932-1933 interregnum and seems to be doing everything in his power to prevent something similar from happening now.

It is not simply a matter of haste, but of the need for good judgment. On Friday, conservative columnist David Brooks, who was anything but a fan of Obama during the primaries and election,
wrote about his enthusiasm for the team the President-elect is building. One may not agree with them, he said, on everything or even most things, but “a few things are indisputably clear:”
First, these are open-minded individuals who are persuadable by evidence. Orszag, who will probably be budget director, is trusted by Republicans and Democrats for his honest presentation of the facts.

Second, they are admired professionals. Conservative legal experts have a high regard for the probable attorney general, Eric Holder, despite the business over the Marc Rich pardon.

Third, they are not excessively partisan. Obama signaled that he means to live up to his postpartisan rhetoric by letting Joe Lieberman keep his committee chairmanship.

Fourth, they are not ideological. The economic advisers, Furman and Goolsbee, are moderate and thoughtful Democrats. Hillary Clinton at State is problematic, mostly because nobody has a role for her husband. But, as she has demonstrated in the Senate, her foreign-policy views are hardheaded and pragmatic. (It would be great to see her set of interests complemented by Samantha Power’s set of interests at the U.N.)

Finally, there are many people on this team with practical creativity. Any think tanker can come up with broad doctrines, but it is rare to find people who can give the president a list of concrete steps he can do day by day to advance American interests. Dennis Ross, who advised Obama during the campaign, is the best I’ve ever seen at this, but Rahm Emanuel also has this capacity, as does Craig and legislative liaison Phil Schiliro.
I am grateful that we have to wait only two months to wait for new leadership and not three years, as in 1929. I am grateful for a President-elect who takes history seriously. I am grateful for the use he and his team are making of the present.

I hope you have a good Thanksgiving!

- Milo

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