Paul Krugman has an informative column up today…
Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.
This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.
As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way. Partying Like It’s 1929 – New York Times
It looks like we now know where the Bush Legacy will lie…
What does Bush have to do with it?
What happened in 1929 was that the GLOBAL economy started to contract as business investment dried up, unemployment increased, banks failed owing to a lack of liquidity, and the stock market collapsed. Anti-free trade protectionist taxes on imported goods is cited as the catalyst.
As a response, the central bank did NOT take appropriate action by providing liquidity as they have done today. Fiscal policy was worse as the government actually RAISED taxes when they should have been cutting taxes. Things did not improve until beginning in 1933 both money supply grew and taxes were cut.
The important lessons learned created institutional changes that resulted in an extensive, active Federal Reserve system, the FDIC, the SEC, and Social Security. Most interesting was the application of John Maynard Keynes’s theories of intervention.
The problem today is that a GLOBAL asset bubble in the technology economy collapsed. Again, Keynesian economic policies were applied to mitigate this collapse. Bush instituted tax cuts exactly as he should have done. The money supply was increased resulting in lowered interest rates and liquidity. Rates were lowered so far and held low for so long that we exchanged the technology bubble for the housing bubble.
Although a real estate recession is more severe than a stock market recession, the institutional changes along with better policy rules should result in a mild to moderate recession at worst or a soft landing at best. So, where should you put your nest egg? It depends on your time to retirement, risk aversion, and your sources and uses of money. Typically, experts will roughly tell you something like stay diversified with 100 minus your age as what percentage of global stocks you should hold with the remainder in global bonds. Imbalances should be rebalanced somewhere around an annual basis.
BTW – Democrats are already removing Bush’s tax cuts right when we need them just like 1929. They’ll need the tax revenue to shore up their excessive spending plans.
It seems to me that the examples you site are the beginning of what we are seeing. You place your trust in tax cuts, I don’t. I look at an infrastructure that has been allowed to rot in and on the ground. Tax cuts have just exacerbated the problem.
If we aren’t careful, we’ll be right back where we were with the CCC in the depression.
As to what Bush had to do with it…does it matter? He’ll still have the outcome attached to his term in office…With the money walking out the door to fight a war and export jobs overseas, he will find his legacy isn’t anything he had hoped for…but exactly what he earned.
The only issue I take with blaming Bush is that it is an overly-simple view that reflects a political view rather than the actual economics. For example, cutting taxes and providing refunds for stimulus is exactly what is prescribed by theory and what Bush has done. The lack of global trade is what precipitated the 1929 Depression, and artificially protecting domestic labor theoretically should bring on another crisis.