Monday, March 03, 2008

Another Great Depression?

Professor Robert Reich, the former Secretary of Labor, runs a blog called, appropriately enough, "Robert Reich's Blog." There, yesterday he asked the question "Are We Heading for Another Great Depression?"

Prof. Reich gives two answers. One of them is brief and maddeningly unexplained: "Probably not," he says.

The other answer is an extensive quote from Marriner S. Eccles' memoir, "Beckoning Frontiers and Personal Recollections." Eccles was FED Chairman -- in effect, a professional forebear of Ben Bernanke -- for more than a decade during the Roosevelt administration.

As Prof. Reich notes with admirable candor, there are "eerie similarities" between the causes of the Great Depression identified by Eccles and the credit crisis we see unfolding today. The trigger for both was the increasing trend of maldistribution of wealth that preceded a credit crunch. Think the Bush tax cuts, for example:
[A] giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
* * *
The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay.
To judge from the comments section, Reich's readers are not happy with his glib "probably not" answer. But what's a former cabinet officer to do?

He couldn't very well say "Hmmm. Sure looks like it to me." Just as with Heisenberg's Uncertainty Principle, the moment an informed observer -- say, an economist like Robert Reich -- predicts, "The Great Depression Is Coming, The Great Depression is Coming," it has "profound implications" on the future itself.

Bernanke knows this, too. That's assuredly why, as the Cunning Realist points out today, he has been so spectacularly wrong in so many of his public predictions about the future of the economy.

Or, as The Big Picture boldly puts it, "If the Fed were to come clean about the present circumstances, it would cause a market panic." The observers, don'cha know, are lying just to protect us.

Keep that in mind every time you read or hear what they have to say.