During Great Depression, Economy Had Upticks

Paul Krugman (my favorite blogger) has an important post on the economy. You should check it out. It has an illustrative chart, too. It argues that we shouldn't get too happy by the recent uptick in the economy, because even the Great Depression saw brief periods of improved economic production.

As a side note, Obama seems to understand this. As reported by The WSJ, on Friday, Obama noted that we should be optimistic that the economy has briefly improved, but we should not be too enthusiastic, because the economic situation is still extremely dire. Thus, Obama is walking the fine line between realism and Motivator-in-Chief.

Democrats Can Bury the GOP

I am going to play "Democratic Strategist" today... I believe that there is an argument that could literally end the GOP, if the Dems pushed it hard enough and long enough. The argument goes like this: (1) the current recession was caused by the rampant speculation and unregulated transactions of bankers, Wall Street, and corporations; (2) the bankers, Wall Street, and corporations were permitted to make these actions because of the recent obsession with deregulation; (3) the GOP is responsible for the deregulation; and thus (4) the GOP caused the current economic crisis.

Here are the details...

Eighty percent of the American public blames banks, financial institutions, and large corporations for the economic crisis, says a Washington Post-ABC News poll. If this outrage can be redirected toward the GOP, the Dems would profit a great deal. To redirect this outrage toward the GOP, Dems should -- and can -- make the case that the GOP allowed these banks, financial institutions, and large corporations to wreck the economy. The key is concentrating on the GOP's obsession with deregulation.

During the years leading up the the Great Depression, Wall Street was rampant with wild speculation. Men (it was only men) were getting very, very rich by placing bets on the stock market. Because the government failed to regulate these acts, the market became artificially inflated. When the bubble popped, the Great Depression resulted. Thus, a lack of oversight permitted banks and Wall Street to get greedy and destroy the economy.

During Roosevelt's presidency, tight regulations over the economy were implemented, and they remained on the books for approx fifty years (until President Reagan). During this fifty year period of regulation, speculation and other shady economy tricks were kept to a minimum. As a result, this fifty year period of regulation saw robust financial success and the creation of a middle-class; true, there were a few recessions, but they were short-lived and relatively minor.

Then came Reagan. President Reagan and his conservative compatriots failed to learn the lessons of history, and thus they deregulated the economy to its pre-Depression condition. As a result, wild speculation resumed, and the financial sector grew and grew and grew. Soon, a huge bubble formed in the 1980s, resulting in the savings and loan crisis, the biggest economy crisis since the Depression.

Yet, the GOP continued to push deregulation, and thus bankers and Wall Street continued to speculate. Wall Street invented credit-default swaps and other totally unregulated multi-billion dollar transactions. Corporations and banks bundled together loans into huge packages and sold them off, even though no one knew how much they were worth (these transactions were subject to little or no regulation). The failure to properly regulate and oversee the housing market permitted housing prices to inflate. All of these unregulated economy entities soon became far overpriced, and when the bubble burst, the current recession resulted.

This was all precipitated by banks, corporations, and Wall Street. Further, banks, corporations, and Wall Street were allowed to make these transactions only because of the GOP's obsession with deregulation.

Thus, the GOP caused the current recession.

If this argument is made as convincingly and agressively and consistently as the Dems' anti-Bush arguments, it would bring the GOP to its knees.

Unions & the Fallacy of All or Nothing

I am strongly pro-union, but I am not blind. I recognize that one of the biggest problems for the US auto industry is union costs.

It is important that our nation permit organized labor. We know that unionization and the New Deal are responsible for creating America's middle class, and it would be a shame to eliminate -- or significantly curtail -- unions and thereby gut the middle class, all so some corporation can grow larger and its executives richer.

But, the unions in Detroit grew too powerful. Union costs make it too difficult for American auto makers to compete on the global market.

Many use this fact -- that the Detroit unions are too big -- inappropriately. Anti-union advocates commit what I call the "fallacy of all or nothing." That is, anti-unionists argue that because the unions in Detroit are too large and too burdensome, it is proof that organized labor is untenable. But that argument assumes a premise that can not be established, namely, that unions must either (a) be as large and powerful as those in Detroit, or (b) non-existent. In other words, people tend to assume that we have Detroit-style unions, or no unions at all. That is incorrect.

Smart regulation of the union-business relationship can provide healthy union membership and strong global competitiveness. It doesn't have to be all or nothing.

G-20 Summit

Generally, these summits aren't particularly fruitful. But this being Obama's first performance on the international stage, the event is under a microscope.

There were two looming issues going in: global regulation -- espoused by France and Germany -- and global stimulus -- espoused by America and Britain. A global regulatory system will not come out of this Summit, but we agreed to promulgate stricter intra-county regulations over hedge funds and rating agencies. Similarly, a global stimulus will not be implemented, but we agreed to fund international financing institutions with $1.1 trillion. Source. If Obama's initial goals constitute the benchmark, the Summit results are a wash.

That is, with one major exception. Apparantly, Obama soothed a tiff between France's Sarkozy and China's Hu Jintao. The Times reports that Sarkozy and Hu Jintao were engaged in a heated exchange over tax havens, when Obama intervened, spoke with each individually, and negotiated an agreement. Such diplomacy is probably Obama's strong suit, and it is nice that he can capitalize on his strenghs. With such actions, America can re-gain some of the respect we lost during Bush's tenure.

Overall, I say: Well done, Mr. President.

Stocks Soar, But What Does It Mean?

The Wall Street Journal reports:

At about 2:10 p.m., the Dow Jones Industrial Average was higher by 252 points, or 3.3%, after climbing over the 8000 mark for the first time since Feb. 10. Over the last four weeks, the Dow has tacked on 21%, its best four-week rally when all four weeks have finished in positive territory since May 1933.

The S&P 500-stock index climbed 3.4%.

This is, of course, great news! But what does it mean? It all goes back to Japan.

In this post, I made the argument that the Fed is doing too little and therefore runs the risk of (softening, yes, but) prolonging the recession. As I noted, Japan has been widely criticized for unnecessarily extending their '90s recession by taking a series of half-measures, and we appear to be mimicking Japan's mistakes.

I fear that the public will look at our recent economic stabilization and reject additional rescue measures, resulting in the half-measures employed by Japan. We should remember that one month of improvement doesn't a recovery make.

Gov. Sanford Can Turn Down Stimulus, Says White House

Here's the report from the A.P.:

White House budget chief Peter Orszag said there is no provision in the stimulus law for state lawmakers to accept that money without approval by the governor.

[South Carolina Governor Mark] Sanford, a Republican, has said he may decline some of the state's $2.8 billion in stimulus money because the White House won't let him use the cash to pay down his state's debt, including bonds and looming retirement system liabilities. South Carolina started the fiscal year with $8.1 billion in total bonds outstanding, according to the state's comptroller.

As of February 2009, S.C. had an eleven percent unemployment rate, among the nation's highest rates, see here. Sanford's decision, should he follow through, will have a devastating impact.

Too Similar to Japan

Twenty years ago, we were all scared that Japan would overtake America as the global economic powerhouse. Then, Japan underwent a sustained, decade-long recession. Interestingly, their recession was never devastating, but it did stop growth and halt Japan's ascension to the top-tier. Why?

Economists recognize that Japan prevented all-out crisis via extensive government intervention. But economists also recognize that Japan lost an entire decade to its recession because it refused to recapitalize its banks. Instead, Japan opted for a middle ground: the government overpaid for its banks' toxic assets. Thus, Japan prevented the utter failure of its banking system, but never had the guts to really solve the problem, which extended the recession.

Sound familiar? It should. America shouldn't be scared to take aggressive action. Otherwise, we might parrot Japan's lost 1990s.

Nationalization Is Beyond the Pale?

This morning, I heard a Fox News radio host say that our government might "nationalize a business for the first time in American history."

Wrong! The FDIC has taken over failing banks in the past, and the federal government nationalized Continental Illinois in 1984. Also, just last year, we nationalized Washington Mutual.

Here is a great article on this and other related matters.