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Worst Economy of the Last 50 Years?

(Note: I've been working on this post since last Friday; apropos of my work, Captain Ed Morissey posted a similar commentary about the state of the economy vs. our reckless plunge into massive deficit spending. I'll take those similarities to mean that I was on the right track, particularly with respect to the 1970's.)

Remember the last eight years, when Democrats ripped President Bush at every opportunity for "throwing away the Clinton surplus" and engaging in "out of control deficit spending," thus "dooming our children to pay for his enormous mistakes"? Remember how Democrats pilloried vice president Cheney for defending President Bush's post-9/11 discretionary spending decisions by declaring that in the short term, when you are trying to stimulate growth, "deficits don't matter"? Remember the big "pay as you go" budget pledge made by Democrats in 2006? Remember how nothing, not even the tech market crash, not even the massive accounting scandals that sank numerous Fortune 500 companies, not even the 2002 bear market, and not even the military action spawned by the 9/11 attacks could justify the Bush Administration's deficit spending?

My, how times change.

Things are bad, there is no doubt. And this past year's economic meltdown was unusually hard on the real estate and finance sectors, which is where Americans invest most of their privately held wealth. Fewer dollars in the bank means fewer dollars to spend, and so our economy is now in the midst of a full-blown recession.

As can be expected, Washington, DC's answer is "spend more." While common sense tells us to spend less when we have less, the government has the luxury of being able to go deeper and deeper in debt by printing money and selling treasury bonds. And President-Elect Obama has wasted no time taking advantage of that luxury. All indicators seem to be pointing to a 2009 Federal budget deficit somewhere between $1.2 trillion and $1.8 trillion. Trillion. T-R-I-L-L-I-O-N. Or up to 12.5% of our current GDP.

Why? Because we are told that the recent economic downturn is so serious that without a significant cash give-away by the Federal Government things will continue downhill and we will be stuck in a years-long recession. Naturally this means we all have to make sacrifices. Well, except for most of the Federal Government, that is.

I can accept the reasoning behind the emergency cash infusion for banks at the end of last year, but I am extremely skeptical about a continuing need for federal "bailouts" in the private sector. So I decided to look at the Dow Jones Industrial Average from 1920 up to the present, in order to see how many serious market downturns we have weathered, and to determine if we are in a bear market/recession cycle so unusual and so catastrophic that the government has no choice but to do something -- anything -- in order to end it.

The Dow Average is not a perfect indicator of recessions, but its track record in that regard is rather good. Most of the recessions of the last 80 years corresponded with market drops, but not every market drop produced a recession. The 1945 recession actually occurred during a 20 percentage point gain of the Dow index. The Dow Index's 27% post-9/11 drop during 2002 had no corresponding recession, nor was there a recession after 1987's "Black Monday."

Here is what the stock markets of the last 90 or so years have looked like:


The period between 1920 and 1940 is obviously defined by the Great Depression, but the nation's economic downfall didn't happen all at once. The 1929 crash erased about 48% of the market's value, yet the market gained back nearly half of that loss during 1930 until the effects of Herbert Hoover's ill conceived economic "fixes" (income tax rate increases, tarriff increases, and a freeze in the money supply) started a downward trend. By the end of 1931 the market lost all of the nearly 300% gain that it made between 1924 and October 1929. The market eventually bottomed out in mid-1932. By that time, it was down 89% from where it had been just three years before. In other words, a dollar invested in the Dow 30 in 1929 would have been worth only 11 cents in mid-1932. By 1934 the Dow Average had doubled from its 1932 low, and by 1937 it had gained another 50%. But that 50% gain was wiped out in another severe recession that began in the middle of 1937. This downturn is now attributed to the Roosevelt Administration's unrealistic artificial wage and price controls and its ongoing legal persecution of industries that performed well while the rest of the economy was down.


The period 1940 to 1960 was the century's first true era of spectacular sustained market growth, with the Dow quadrupling in value from 150 points in 1940 to 680 points in 1960. The only major market drop (33%) occurred during the 1941-1942 period that marked America's entry into WWII. This twenty year period was remarkable for its low inflation and the advances in electronics and computers following the war. Even so, the Dow still suffered during the 1957 recession, losing 20% of its value by the end of that year.


The period between 1960 and 1980 was largely one of stagnation. The Dow Index finished 1980 at around 840, up only 19% from its 1960 value of 680 points. The technological advances of the space race (satellites, computers, etc.) were obviously not enough to offset the massive stagflation of the 1970's, which actually makes the dull percentage point performance of the Dow Average seem even worse. Throughout the "Oil Embargo" recession of 1973 and 1974, the Dow average shrank 45%, ending the year 1974 at 577 after reaching a peak of 1050 at the beginning of 1973.


The period between 1980 and 2000 was another era of incredible market growth. This even includes the ominous "Black Monday" of October 19, 1987, when the Dow average fell 20% in one day, the largest one-day market drop in US history. By the end of October, the US Dow average was off 35% from its mid-year high of 2700 points. It ended the year down over 40%.

Wikipedia notes,

Following the stock market crash, a group of 33 eminent economists from various nations met in Washington, D.C. in December 1987, and collectively predicted that "the next few years could be the most troubled since the 1930s."

The Dow recovered its 1987 losses by mid-1990, only to take another 21% dive that year. But after that, the Dow gained an unbelievable amount of momentum and ended the year 2000 at 11,500. That's just a little over an order of magnitude (10x) growth in twenty years. Just like the 1940-1960 period, very low inflation, low interest rates, and the incredible growth of technology (cell phones, computers, and the Internet) contributed to overall economic growth during the 80's and 90's.


So what about the last ten years? Interestingly, they strongly resemble the years 1960 - 1966. The marked bottomed out in 1962 (the Dow was off 28%), similar to the post-9/11 drop in 2002 (27%). The 1963 - 1965 market recovered and grew by 25%, but shed all of that growth in 1966. The Dow grew 45% between 2003 and 2008, but ended the month of November 2008 with a 45% drop in index value from its all-time high of 14,164 in October 2007. We tend to remember the 1960's as a period of "prosperity" but the history of the market seems to tell a different story. And after the lackluster 1960's, we had the recession and inflation-driven 1970's. Does a similar situation await us in the next decade?

According to the historical data, the United States has suffered five periods between 1920 and today where the value of the stock market dropped greater than 40% -- 1929 to 1932, 1937, 1973 to 1974, 1987, and 2008. Both of the market drops during the 1930's were either worsened or directly caused by misdirected government intervention. And the 1970's was defined by Keynesian economic policies throughout the Nixon, Ford, and Carter administrations, beginning with Nixon's wage and price controls and ending with Carter's attempts to manipulate the market through interest rates and cap the cost of energy through excessive government regulation. In contrast, despite the suddenness and the size of the 1987 market drop, the Reagan Administration eschewed an overblown response, and the market recovered on its own. Liberals like to point out that most major recessions have occurred during Republican administrations. But market data also indicates that the longest and most damaging recessions occurred during times of heavy interventionist government policies, the kinds of policies strongly supported by today's Democrats.

It would seem unlikely then that we HAVE to spend trillions of borrowed dollars if we want the economy and the markets to recover. We will be in even bigger trouble if spending is supplemented with tax increases and attempts to punish successful industries (oil windfall profits taxes immediately come to mind). For the time being, we are probably stuck with "Hope And Change®" with a mind-boggling price tag, because that seems to be what people want. But we would be wise to keep as much restraint on spending, tax increases, and regulation as we can. That is, unless we want another repeat of the 1970's.

And personally, I can't stand corduroy.


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Comments (24)

Good research,interesting a... (Below threshold)

Good research,interesting analysis.

We didn't wear corduroy back in the 70's; we wore polyester...which in turn led to the oil shortage. The Arabs didn't embargo us because they were offended by our support of Israel; no, they were offended by disco. Who could blame 'em?

Now, our condoms were made of corduroy because we were making "a groovy kind of love".

Actually Mike, I seem to re... (Below threshold)

Actually Mike, I seem to recall wearing a lot of corduroy during the 1970's, but maybe that was because I was a kid. There's nothing worse than having your pant legs make that "vvvvvt - vvvvvt - vvvvvt" sound when you walk.

So let me see if I've got t... (Below threshold)

So let me see if I've got this cycle thing correct.

The starting point is that the economy is... not as good as it could be. Democrats get into office saying "things could be better!" and promise all sorts of programs to make things better.

Programs get implemented - and after a brief period where you can persuade yourself that the fixes work, things fall apart. The answer is 'more money, more programs'. Money is spent, programs are made, and things don't really improve.

The electorate is pissed at Democrats, and then elect Republicans, who rescind the worst excesses of the Democrats and let the economy heal naturally - but by that time a recession has happened. Never mind that it's apparently a necessary thing - the 'R' word is not to the Republicans' political advantage.

Because the economy is not perfect, the Democrats make much of it, promising they can fix things if they can only implement more programs.

So Democrats get into power again - implement more fixes that end up with the opposite effect over time. The country heads into recession again.

Republicans get into power - cut taxes, delete the more harmful fixes. However - Democrats make every change sound like the Republicans are tearing off the top of poor babies' milk bottles and guzzling down the formula themselves. "Fairness" is brought into the political vocabulary, with the inferred and implied meanings that only Democratic proposals can be 'fair'.

Voters, having a hard time believing that the promised land of milk and honey isn't achievable by government spending, get Democrats back into office. The milk curdles, the honey is seen as something golden and liquid all right - but hardly sweet. Taxes are raised. "Fairness" is paramount. Economy goes into recession again... a bit worse this time. Little nudges each way, time after time, usually at the worst possible times to damp down the cycle.

And we keep repeating the cycles until... depression and bankrupcy resets the swing.

Looks like a positive feedback cycle to me - with some damping but not enough to keep the feedback from running away.

You ever hold a microphone too close to a speaker and get a really loud squeal? That's positive feedback. But you can get the microphone close to the runaway feedback point, and get some pretty interesting sounds out of it. What happens, though, if someone grabs your hand and sticks the microphone right in front of the speaker?

Yes - it runs away, you get a god-awful squeal. In physical processes, you can look at the Tacoma Narrows bridge - the thing swung a bit until the wind forces hit a resonance point... and then the feedback went way out of control. The bridge wobbled a lot - then broke apart.

But our economy (if you'll forgive the bridge parallel) needs a little bit of feedback to keep things going. The damping is usually done by market forces, as in the mortgage market where you had to have a job, good credit and such to get one - but the Democrats (in the name of 'fairness') removed the damping forces.

And runaway feedback ensued. Now we've thrown a hell of a lot of money at the problem - and it looks like more will be thrown because the problem didn't correct itself IMMEDIATELY. But I'm thinking the market can't correct that quickly - it's going to need a year or more to settle down seeing it's being banged from one extreme (everyone with a pulse being able to qualify for some sort of mortgage) to the other (credit score of 1203.6 on a 300 to 850 scale to get a 30-year fixed...).

But politicians need results NOW to the fixes they propose and implement NOW. They can't afford to wait, because someone else might take credit for the recovery.

And in the mean time, we consumers get it in the neck. Well, that Tacoma Narrows bridge collapse was a hell of a show, wasn't it?

Summing up Lawson:... (Below threshold)

Summing up Lawson:

Repubs good, Dems bad. Work on your word count will ya? You lost me after about the 15th redundant thought.

What I want to know is, whe... (Below threshold)

What I want to know is, when are we going to start seeing hectoring, scolding articles in the MSM that say "how can the president-elect spend millions of dollars on his inauguration when the economy is so bad for most Americans?" After all, we used to get articles like that ALL THE TIME after a Republican was elected, so let's see if we see similar articles this time around

Summing up JFO -I'... (Below threshold)

Summing up JFO -

I'm lazy, so I snark.

OregonMuse -Democr... (Below threshold)

OregonMuse -

Democrats are on the side of the angels, after all. Spending millions on an inauguration, new china for the White House, party favors and all that - it's simply stimulating the economy, not wasting money.

It's interesting that Obama's already saying he's going to have to scale back his promises. Hoping for change back from the trillions spent, perhaps?

I would like to know why th... (Below threshold)

I would like to know why the government doesn't cut back on it's programs and lay off some staff like the real world. I know why, because they don't have to. And JFO, like it or not, the economy crisis happened under democratic leadership which has total spending control and oversight. They screwed it up big time. ww

JLawson,Do you rea... (Below threshold)
Dave Noble:


Do you really expect JFO, or anyone else for that matter, to waste their time presenting a cogent argument to your rambling flight of ideas underlaid with a historical fantasy sequence. And your economics degree is from what - the University of Bong? There is a vast difference between lazy snark and a prudent assessment that your interlocutor is tripping.


Shorter Dave Noble:<p... (Below threshold)

Shorter Dave Noble:

"I'm lazy - so I snark also."

Seriously, where's the fantasy? The comparing the wild thrashings of our politicians to the Tacoma Narrows bridge, or positive feedback cycles where everything done to 'fix' a problem only ends up making it worse?

You snark, but you have no solutions to offer and resist with great zeal and stupidity any attempt to define the problems we face in a way that might lead to some other action than "Give more power and authority to the government, and let THEM fix the problem." - ignoring that they caused a lot of the trouble in the first place.

WeeWilleWhat other... (Below threshold)


What other fantasies do you spend your time on. Oh, never mind, who the hell would want that information from a winged-out wingnut.

Unfortunately your Dow grap... (Below threshold)
John S:

Unfortunately your Dow graphs are misleading because they are not indexed to inflation. For example the period 1966 to 1982 wasn't stagnation: indexed to inflation it was a spectacular 16 year bear market where the Dow plunged below its real value during the Great Depression.

The 401K scam has caused the markets to shoot up since then. And that worked out great. We've got the Baby Boomers nearing retirement, their company-paid pensions disappeared 20 years ago, and now they've lost their 401Ks too. I wouldn't want to count on a quick recovery when there's 65 million of us that won't be spending an unnecessary dime for the rest of our lives.

And this may or may not be the worst economy since 1932, but wait until Obama's 5 trillion in yearly "stimulus" plans backfire. Government meddling will make the Great Depression seem like good times.

John S - I alluded to your ... (Below threshold)

John S - I alluded to your point about '66 to '82 when I said that stagflation "makes the dull percentage point performance of the Dow Average seem even worse." I should have expanded that point more thoroughly. You are absolutely right, because from the end of WWII through the end of the 1960's, inflation was incredibly low. During the 1970's and early 1980's, out-of-control inflation wiped out virtually all of our economic growth, particularly the value of investments.

The rate at which we are expected to accumulate debt and try to stimulate the economy by printing more money scares the willies out of me, because I can't see that much currency being dumped into the economy without a lot of inflation to go with it.

It's doubtful that we will ever see another order of magnitude growth in the value of our investments. Part of what precipitated this post was a discussion I had with my financial adviser last week. He told me that the annuities and bond managers in his office are now very busy. People are "twice shy" (first tech stocks, and now mortgages/banks) about magical stock market returns and are looking for stable, long-term instruments for investment.

Jlawson,I'd go rea... (Below threshold)
Dave Noble:


I'd go real gentle on the "stupidity" attribution, if I were you. But then when you have more cojoness and chutzpah (sounds like a dish at Jose Lipshitz' Bar and Grill) than brains, as you appear to have, why not go for it?

FDR's reaction to Hoover's laissze faire-induced Depression (let the market run its course) fed starving Americans and put them to work. All the Tacoma Bridge analogies in the world won't wipe out that reality.

And I have no solutions? What's your solution Milton Hoover Lawson? Let the market run its course, lest we set the bridge to swingin'? To that I reply with the words of Harry Hopkins, FDR's relief czar - People don't eat in the long term they eat every day.

Let's see? Davy Noble compa... (Below threshold)

Let's see? Davy Noble compares the depression era with 28% unemployment rate to today's 7%. Only a dem can draw that parallel. ww

FDR's reaction to ... (Below threshold)
FDR's reaction to Hoover's laissze faire-induced Depression (let the market run its course) fed starving Americans and put them to work. All the Tacoma Bridge analogies in the world won't wipe out that reality.

Of course, this is not reality. Hoover was not a free-marketer and in fact put many gov't programs in place. FDR just expanded on what Hoover already had started, and economists now say that these programs prolonged the Depression by approx. 7 years.

If this isn't the worst eco... (Below threshold)

If this isn't the worst economy in 70 years, it will be by the time Obama gets done with his Marxist reforms.

Something that needs to be ... (Below threshold)

Something that needs to be done with any disaster, Dave, is define the problem and figure out what caused it. Simply screaming "Bush did it!", "Republicans want to starve everyone!" or "Democrats are trying to HELP everyone, so you shouldn't look at what they've done!" doesn't help.

Okay - the mortgage market faced a meltdown. WHY? Because there were too many mortgages in default. WHY? Because there were too many people in mortgages they couldn't pay. WHY? Because SOMEONE in government decided that EVERYONE should be able to own a home.

Which party was that notion affiliated with, Dave?

Fannie Mae Eases Credit To Aid Mortgage Lending - New York Times
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
September, 1999.

And what did THAT stupid idea eventually cause?

Subprime mortgages. ARMS that adjusted to astronomical levels, interest only-loans, negative amortization loans. People getting loans for amounts they had no hope of EVER being able to afford the payments on AFTER they adjusted, but they still got them. For a while it seemed like the only thing that you needed to qualify for a $150k loan was a phone number and a pulse, and the phone was optional. (Could be the pulse was too, it's hard to say.)

So the shit hits the fan - ARMS readjust. People start defaulting, banks are in trouble. Was the best course to have the government create an additional $700 billion in debt and toss it at the problem as fast as it could? Or maybe it would have been better to have the banks deal with it in a different manner, perhaps repossession with a rent-to-own option? How many loans actually were in trouble, for what total amount of money?

"Nope, sorry! Those details aren't important! What's important is that we throw lots of money at the problem right NOW, before things get worse!"

It's later. The money's gone into a black hole, to maybe reappear somewhere else. And things are worse.

What options were available that WOULDN'T have sent a signal to every business in the US that they could expect a government bailout if they were facing hard times? (Including the porn industry, oddly enough. You'd think hard times would be good for them...)

On paper, the engineering of the Tacoma Narrows bridge looked sound. Weights, stresses and the like were well within the tolerances of the materials used. The engineers didn't take into account the way the bridge would react to the wind.

On paper - the mortgage stuff looked reasonable. But you had buyers approved that would NEVER have qualified otherwise - because the government mandated it. When problems were pointed out, attempts to change the programs were blocked because it wouldn't be 'fair'. The mortgage lenders HAD to come up wihth something, so you had subprime loans, interest only loans, all sorts of creative financing... with Fannie and Freddie buying up the bad paper.

They didn't take into account dumb-ass buyers who bought more house than they should have, who probably shouldn't have been homeowners in the first place, and who walked when they couldn't make the payments.

They didn't take into account dumb-ass congressmen like Barney Frank who said the following:

New Agency Proposed to Oversee Freddie Mac and Fannie Mae - New York Times
''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
September, 2003

The bridge IS swinging, Dave. It was swinging long before last year's collapse. We've had a few pieces fall off - but we still have time to stop the swinging before a complete collapse. Now the arguement's about how best to stop the swinging, not whether it's wobbling in the first place.

And there's way too much momentum to stop it quickly. It may well be the bailout helped, and it WILL take time for the market to stop wobbling - six months to a year or more. The bailout may cause more trouble down the line - it took about 9 years from the time Fannie Mae eased credit requirements to the time the system imploded under too much bad paper.

We can't tell. And the government urge to "Do Something About The Problem" may not be the thing to do.

At this point, the government needs to step back and see what's really needed, not grab what they think will get them the most votes. Sadly - I don't think they've got that much restraint.

Oregon,"FDR just e... (Below threshold)
Dave Noble:


"FDR just expanded on what Hoover already had started, and economists now say that these programs prolonged the Depression by approx. 7 years."

That is revisionist history of either the most confused or the most dishonest sort,
What economists? - Monica Crowley and Brit Hume?

If FDR was failing in his attempts to deal with the Depression, why was he reelected twice? Must have been the same kind of stupid Americans who elected Barrack Obama. Conservatives love to talk about the average American voter and accuse liberal elites of looking down their noses at them. Until the American people vote for a Democrat. Then they become the sheeple, the great unwashed and uneducated mass of gullible fools.


Your idealogy is showing. Actually it's not even idealogy, which argues from core principles. In your case, it's just knee-jerk partisanship.

JFO nailed it - Dems bad, Repubs good.
There is a level of oversimplification that crosses over into gross distortion. You stomped across that line way back.

Did Fannie Mae and Freddie Mac play a large role in the current financial meltdown? Without a doubt. Were Democratic legislators irresponsibly blinded by their desire to increase low-income home ownership? Affirmative.

However, the current crisis, analyzed objectively, reveals so many causes, among them:

-Extremely low interest rates.

-Speculation in home buying, born of heedless greed, and not of the basic desire to put a roof over one's head,

-The undoing of Glass-Steagall's wall between investment banks and commercial banks (That socialist New Deal dinosaur)

-Moody's in bed with the corporations whose soundness they were rating

-The increase in allowable leverage ration to 30:1 (Henry Paulson was one who lobbied for it)

-President Bush's much vaunted "Ownership Society"

-Complex financial instruments, like derivatives, which that old socialist Warren Buffett characterized as economic instruments of mass destruction.

What we need now is pragmatic ecomomic solutions, not idealogy of the left or the right.

That is revisionis... (Below threshold)
That is revisionist history of either the most confused or the most dishonest sort,

First of all, that Hoover started a boatload of government programs in response to the Depression is simply historical fact that scarcely needs proving. You can look it up in any decent history book.

Second, as to my other assertion, that FDR's policies actually prolonged the Depression, do a Google lookup on "ucla economists fdr" and educate yourself.

Third, as to why FDR kept getting elected, that's not rocket science: then, as now, passing out free tax dollars does have it's advantages, including expanding your voting base. Also, many Republicans were pretty much bumblefucks back then, too.

So your point is pointless.

Ok, people. Simmer down.</p... (Below threshold)

Ok, people. Simmer down.

Dave's quote:

That is revisionist history of either the most confused or the most dishonest sort, What economists? - Monica Crowley and Brit Hume?

Well, Dave, not really. It was two UCLA economists. From the University's online newsroom, dated 10th August 2004: FDR's policies prolonged Depression by 7 years, UCLA economists calculate

Quoted from this article:

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

Keep in mind, Dave, this article was written well over four years ago, long before anyone started talking up trillion dollar annual deficits.

Read it. Don't worry, it wasn't shadow-written by Republican hacks, so it won't kill you to have a read of it. The writer's point was that FDR created the following chain of events that led to a perfect storm of prolonged joblessness and misery:

Protectionist legislation = price increases
Higher taxes = less money to spend and invest
Higher wages (NIRA required wages to increase by at least 25%, see the article) = price increases
Anti-competitive law, allowing collusion amongst businesses = price increases


Higher prices, coupled with less money to spend and invest, meant that consumer confidence was down and businesses were unable to grow. Never mind that WPA and CCC make-work projects competed against private sector companies for work.

No one is arguing that there were some horrible excesses in the financial industry during the go-go times of securitized subprime loans. My favorite (yes, being sarcastic) was the company official from Countrywide who assumed that people wouldn't default on their loans simply because they would value their credit rating. Un-frickin'-believable.

But the subprime meltdown and resulting credit crunch were nothing more than symptoms that Uncle Sugar had dicked around in the markets and encouraged sub-commercial behavior and practices, and that some companies had staved off their own financial demons while the market was artificially high (anyone remember the plight of the airlines right after 9/11?). Chief among these were the Big Three automakers and their ruinous labor contracts with UAW. One statistic in the Detroit Free Press (Google is your friend) stated that the Job Bank program cost the major automakers and Delphi over $2.1 billion dollars from 2005 - 2007 alone. By the way, GM first allowed the creation of the Job Banks back in 1984. That's a long, long time to be paying employees to do nothing.

But still all of this pales in comparison to the threat on the horizon now, thanks to Uncle Sugar's mooted $1.2 trillion annual deficit next year, and "several years" worth of trillion dollar deficits:

Money is never "parked". It's always invested in something. Broad categories of investments are capital/equity (stocks) and debt (bonds, mortgages, commercial paper, etc.). The balance of investment, equity vs debt, depends on supply and demand, including raw availability of each kind of investment and the perception of its risk level.

Now, suppose you are a pension fund manager working on behalf of a Fortune 500 company. You have money to invest on behalf of your employees, who expect a return. Equity markets are losing huge amounts of value in roller-coaster ups and downs; meanwhile, debt is low interest but safe. Unless you are investing for a long, long term, for example, would you buy shares of General Motors, or would you buy a Treasury bond?

So when Uncle Sugar spends like a drunken sailor, how do you think he gets the money?

He prints it.

Then he issues Treasury bonds as IOUs to back the newly printed money.

Those T-bonds are like candy to investment advisers right now because they are low risk. In fact, they are in such demand for that very reason that last month, the return on some longer-term T-bonds was less than 0% for the first time in decades.

What does that mean?

It means that investors expect massive risk in equity markets; so bad, in fact, that they are willing to forego any positive return and pay Uncle Sugar to keep their money safe (after all, they can't bundle it up and hide it under their mattresses).

Had Uncle Sugar not issued so much new debt, those managers would have had to hold their noses and invest in the least risky capital they could find.

But thanks to Uncle Sugar, that money will not be invested in equity.

All else being equal, the failure to invest in equity drives two things: lack of capital for growth, and erosion of stock value.

When a company's stock value (market capitalization) drops to a level below its debt obligations, the company becomes bankrupt.

And when that happens, more people lose their jobs.

Oh, and all that TARP money spread around a couple months ago? It got hosed up by the banks, who are sitting on it and not lending it out. In terms of job creation, it might as well have been poured down a drain.

Obama is setting up a perfect storm of debt via trillion dollar deficits and taxation on small businesses that will suck the life out of the capital markets, raise prices, and prevent jobs growth in the private sector.

And the lecture on why Government is a grossly inefficient spender of money, vs private industry, is an equally long lesson.

None of these issues lend themselves to quick sound bites. Only ignorance of basic economics does.

Nicely researched and writt... (Below threshold)

Nicely researched and written article, Michael.

Oregon,I stand cor... (Below threshold)
Dave Noble:


I stand corrected on my characterization of Hoover as "laissez-faire." Thank you. That was a misstatement. It should be noted, however, that Hoover unsuccessfully tried tax cuts for the wealthy to stimulate the economy. But I stand firm on my depiction of the idea that FDR's policies prolonged the Depression as revisionist history.

Please see below.

Wander and Oregon,

I am familiar with the UCLA study. Do you know how? Because stuff like that gets passed around from Rush to Sean to Monica to Brit to Hot Air to Wizbang, and other conservative blogs. It's like viral video. Two economists cannot rewrite economic history.

The Milton Friedmans and John Maynard Keynes' of the world may disagree on theory, but FDR's success in bringing the US out of the Depression and ameliorating its effects on average Americans are a matter of historical record.

Are you an economist, Wander? You appear to posit yourself as one, but you'll have to excuse me if I question your credentials. I am not an economist, so I listen to the experts.

Some experts -

Nobel laureate in Economics, Paul Krugman:

"That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the '30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful "not because it does not work, but because it was not tried."

This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools. Didn't all these public works amount to a major fiscal stimulus?

Well, it wasn't as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren't felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

And F.D.R. wasn't just reluctant to pursue an all-out fiscal expansion -- he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections."

FDR didn't prolong the Depression, he set back the recovery, he had enabled, by reducing spending and raising taxes in 1937-1938 - Conservative economic policies

Here's Ben Bernanke, academic expert on the Depression and Chairman of the Federal Reserve Board, on FDR's failed economic policies:

While Ben Bernanke was teaching economics at Princeton University in late 1999, he admonished officials in Japan for doing too little to get their country out of its economic funk. Their model, he said, should be Franklin D. Roosevelt.
"Roosevelt's specific actions were, I think, less important than his willingness to be aggressive and to experiment -- in short, to do whatever was necessary to get the country moving again," Mr. Bernanke said in a paper on Japan's paralysis.

And again:

Mr. Bernanke: Well, I have worked a great deal in the Great Depression and learned a great deal from those studies. My assessment of the thirties is that there were two primary forces that caused the Depression and whose correction led to recovery. Those were, first of all, inappropriate monetary policy. The monetary policy of the thirties led to a deflation of ten percent a year so it was an extraordinarily tight monetary policy, which created among other things the greatly increased value of debts, which led to more defaults and bankruptcies.

The second element of the Depression that was critical was the collapse of our financial system. Again, that the government allowed to happen that went on for a three and a half years without any significant action; the banks failed, the stock market crashed, other credit markets stopped functioning, foreign exchange markets stopped functioning and that collapse of the financial system together with the deflation and monetary policy was the basic reason why the Depression was as severe as it was.

Franklin Roosevelt did two things when he became a president that I think were the most important things that helped bring the economy back.

First of all, he relieved the pressure that the U.S. faced from the constraints of the gold standard which allowed monetary policy to reflate and prices began to rise and began to normalize the price level and to return back to its levels that had been sustained earlier in the thirties.

Secondly, he declared a bank holiday and during that period banks were evaluated and were only opened at least that was the official line when they were shown to be sound,."

You really need to start leaving economics to the pros. The following is typical of the sophisticated, authoritative economic analysis available here and at other conservative blogs:

"I just got done reading this Q&A with Ben Bernanke. In it, Bernanke wastes no time blaming a lack of Fed intervention as the cause of the Great Depression. Bernanke also conflates Roosevelt's homicide of the gold standard with "pressure relief." You know, like a massage in a nice warm hot-tub. Why not blame mothers and apple pie for the Great Depression, too?

If Bernanke studied the Great Depression, then he certainly didn't learn any lessons. To suggest that the gold standard precipitated the 1929 recession and subsequent Great Depression requires either complete and total cognitive deficiency, or else intellectual dishonesty."

And here are the qualifications of the blogger who claims that Ben Bernanke, who wrote his doctoral thesis on the Depression and is Chairman of the Federal Reserve Board, doesn't understand the Depression:

Mark served honorably for four years on active duty in the Marine Corps infantry, and was a candidate for a municipal office in 2002. Mark has helped raise awareness of military and veterans' issues, by establishing No Anthrax Vaccine.

Since 2000, he has been reading the great minds of the Austrian School of economics, such as Murray Rothbard, Henry Hazlitt, Ludwig von Mises, et al. Mark has been known to worship images of Murray Rothbard in the past. Well, not really, but Murray Rothbard is Mark's number #1 hero. He credits the VA with having led him to the Austrian School of economics, since it was dealing with the corrupt VA that served as the impetus for his political epiphany.


I'm sure Mark was a fine Marine and that you're real good at whatever you do in real life, Wander. Having said that ,call me crazy, but I think I gotta go with Paul and Ben. Must be that elitist streak of mine. That's the problem with the photosphere. Bloggers think that because they can read and write, their opinion on any subject is somehow authoritative.

Sorry should be blogosphere... (Below threshold)
Dave Noble:

Sorry should be blogosphere. Uncorrected spellchecker malfunction.






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