Back to your regularly scheduled crisis...

RGE - New recommendations to solve our financial crisis (and I admit that I was wrong)

One advantage we have over the folks of 1930: we know this song. The response of government leaders since the crisis started in December 2006 (when the mortgage brokers began collapsing) has been slow, reactive, and incremental. In many ways similar to that of President Hoover’s administration between 1929 and 1932. While recognition of the danger has been slow, action following recognition will be fast.

Also, we understand economics better. Keynes wrote The General Theory of Employment, Interest, and Money in 1936 (although the ideas it presents we in circulation much earlier). Plus we have the work of others during the past 70 years, such as Hyman Minsky and Milton Friedman. The gross policy errors made during the 1930’s — such as raising taxes and trade barriers — are far less likely today.

I made a comment to a coworker who asked me if I thought we had turned around after the latest round of announced stratospheric bailouts that I don't think we are near the end. I also said that the financial system won't collapse. Governments will pull out all stops to prevent it. There is no other option. My biggest worry wasn't in this troubling but needed market crisis, but rather on the impact on the real economy. Economic indicators have been pointing to a recession for some time now (see You know this but do you feel it) and lost production is a permanent loss in economic welfare.

I think we are or have been in a recession, but I don't much care about the label. Consumers have been feeling the pain for many years in the form of stagnating wages and wealth. Class warfare is very real in today's US economy (whether it is desired or not is up to another post). The ones who will need the greatest help will be the middle and lower classes. The ones loosing the most from the financial crisis are also the ones getting the huge bailouts, meaning they benefited from the risks without paying the consequences. But bailing them out won't help the real economy and if anyone thinks that consumers will borrow their way out of their slump, they are mistaken.