The events of the last few weeks — gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor’s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market — bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then.
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“The parallels to what is happening now are very strong,” Robert McElvaine, author of “The Great Depression: America, 1929-1941” and a professor of history at Millsaps College, said this week. Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis.
Are we at similar risk today? David Bianco, chief investment strategist for Merrill Lynch Bank of America, told me this week that “the market is collapsing faster than any fundamentals would warrant.” The possibility that the United States faces a recession as bad as 1937’s seems far-fetched. Nonetheless, Mr. Bianco notes that the market is now pricing in an 80 percent chance of recession, one likely to be more severe than in 1991.
Actually worth reading the whole thing. It's an interesting analysis.
I'm currently reading House of Morgan by Ron Chernow, and was a bit disturbed by the similarities of the pre WW I and the mid 1930's. It's quite worrying.
ReplyDeleteSince the book was written in the late 1980's, it has none of the biases that the last 10 years or so would bring to the discussion. At some points it glosses over how stuff worked back then and left me thinking that I'm not getting the whole story, but it a fine read.
NYT article, while good, has two significant errors:
ReplyDelete1. "In the current context, it’s hard to blame the Fed for being too restrictive in its monetary policy, as the Fed was in 1937."
False. Inflation is far, far below the target of 2%, Nominal GDP has fallen far below trend, and unemployment has skyrocketed. The Fed has been far too restrictive in its monetary policy.
2. "But monetary policy can only do so much, especially if fiscal policy is moving in the opposite direction."
Also completely false. Even Bernanke admits that the Fed is far from out of ammunition. And any macroeconomist will tell you that the Fed's powers completely dominate fiscal stimulus. If the Fed is doing its job, fiscal stimulus has exactly zero effect.
Other than that, the NYT article is actually pretty good! :-)