European Model Avoids Risk of Inflation

As we know, European countries are suffering from the same economic crisis as America. Yet, Europe's efforts to slow and end the recession do not run the risk of inflation. America, on the other hand, will almost certainly suffer inflation in a few years. What's the difference?

In Europe, each country has implemented a fairly elaborate social safety net. To name just two such measures, European countries offer universal health care and robust minimum income measures. There are many others, of course.

As a result, European countries do not require a gargantuan stimulus package, because (a) human suffering is kept to a minimum through these safety nets, and (b) such government spending replaces the lack of private economic demand.

Thus, inflation is not likely to result in Europe.

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.

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.

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.