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Surviving the Great Collapse
Mar 12, 2009
This economic crisis doesn't have to be a second Great Depression -
if government does nearly everything right, and soon. But if government
doesn't do more, and fast, this could be worse than the 1930s. Why?
Three big reasons:
Finance: A Doomsday Machine.
The financial system is in far worse shape than it was when the stock
market crashed in October 1929. In the 1920s, there was a stock market
bubble, mainly because people could play the market "on margin,"
borrowing to invest in stocks. There were also scams like the original
Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to
enable the game, with low interest rates and few rules.
But
today, thanks to "securitization" of loans and the ability of insiders
to create exotic and unfathomable financial instruments, the
speculative system makes buying stocks on margin look like child's
play. In the aftermath of the crash of 2008, the process of sorting it
all out and getting banks functioning again is something that markets
simply cannot do.
We are not even clear who owns what. The wise
guys on Wall Street invented a doomsday machine from which there is no
market escape.
In 1929 when the stock market crashed, the banking
system was relatively healthy. Bank customers played these speculative
games and took the losses, not banks. This time, the banks drank their
own Kool-aid.
It took until the awful winter of 1932-'33 for the
general depression to fully infect the banking system, and cause over
7,000 banks to fail. But Roosevelt's cure - deposit insurance and a
temporary bank holiday to sort out good banks from bad - quickly got
the financial system up and running again. Today, the banking mess is
still dragging down the real economy, with no effective cure in sight.
Wealth, Deficits, and Demand. The
economy now bears all the hallmarks of a depression. Between the
housing collapse and the stock market crash, American households are
out several trillion dollars (in the 1920s, there were no 401(k) plans
and less than 2 percent of Americans owned stock).
When people
are suddenly out a lot of money, they spend less. Weak demand in one
sector is cascading into other sectors. People spend less on autos, air
travel, hotels, restaurants, clothing - any optional purchase. Business
sales and profits are down, which causes other layoffs, and the cycle
deepens.
Roosevelt was said to be a big spender, but his biggest
peacetime deficit was only about 6 percent of GDP. This year, the
deficit will exceed 11 percent, and the recession will deepen all year.
It took the truly massive deficits of World War II - nearly 30 percent
of GDP - to finally end the Great Depression
A Debtor Nation.
America in 1929 was a major international creditor. Today, we are the
world's biggest debtor. The financial bubble created the illusion of
prosperity.
During the bubble years, the foreign borrowing
disguised domestic weaknesses, such as our much-diminished
manufacturing sector. For now, foreigners are still willing to lend us
vast sums, but that may not continue indefinitely.
All these
economic calamities have solutions, but each is more radical than
what's currently on offer. The government will have to temporarily
nationalize major banks, sort out good assets from bad ones, and then
return banks to responsible private ownership. To cure the housing
collapse, government should directly refinance mortgages, rather than
bribing banks to ease terms.
Deficits will have to be a lot
larger before they can get smaller. That should not require a war; this
is just as grave a national emergency. Those deficits could purchase
much broader prosperity.
This crisis doesn't yet have a name. It
has all the hallmarks of a depression, but people are understandably
reluctant to use the D-word. So let me suggest one: The Great Collapse,
since this was both a financial collapse and an ideological one.
Can
America recover from a Great Collapse? Can we avert a second Great
Depression? To coin a phrase, yes we can. But we need the right
strategies and we don't have much time.
An Urgent Message From Our Co-Founder
Dear Common Dreams reader, It’s been nearly 30 years since I co-founded Common Dreams with my late wife, Lina Newhouser. We had the radical notion that journalism should serve the public good, not corporate profits. It was clear to us from the outset what it would take to build such a project. No paid advertisements. No corporate sponsors. No millionaire publisher telling us what to think or do. Many people said we wouldn't last a year, but we proved those doubters wrong. Together with a tremendous team of journalists and dedicated staff, we built an independent media outlet free from the constraints of profits and corporate control. Our mission has always been simple: To inform. To inspire. To ignite change for the common good. Building Common Dreams was not easy. Our survival was never guaranteed. When you take on the most powerful forces—Wall Street greed, fossil fuel industry destruction, Big Tech lobbyists, and uber-rich oligarchs who have spent billions upon billions rigging the economy and democracy in their favor—the only bulwark you have is supporters who believe in your work. But here’s the urgent message from me today. It's never been this bad out there. And it's never been this hard to keep us going. At the very moment Common Dreams is most needed, the threats we face are intensifying. We need your support now more than ever. We don't accept corporate advertising and never will. We don't have a paywall because we don't think people should be blocked from critical news based on their ability to pay. Everything we do is funded by the donations of readers like you. When everyone does the little they can afford, we are strong. But if that support retreats or dries up, so do we. Will you donate now to make sure Common Dreams not only survives but thrives? —Craig Brown, Co-founder |
© 2023 Boston Globe
Robert Kuttner
Robert Kuttner is co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. He was a longtime columnist for Business Week, and continues to write columns in the Boston Globe and Huffington Post. He is the author of Everything for Sale: The Virtues and Limits of Markets, The Stakes: 2020 and the Survival of American Democracy, and his newest Going Big: FDR's Legacy and Biden's New Deal.
This economic crisis doesn't have to be a second Great Depression -
if government does nearly everything right, and soon. But if government
doesn't do more, and fast, this could be worse than the 1930s. Why?
Three big reasons:
Finance: A Doomsday Machine.
The financial system is in far worse shape than it was when the stock
market crashed in October 1929. In the 1920s, there was a stock market
bubble, mainly because people could play the market "on margin,"
borrowing to invest in stocks. There were also scams like the original
Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to
enable the game, with low interest rates and few rules.
But
today, thanks to "securitization" of loans and the ability of insiders
to create exotic and unfathomable financial instruments, the
speculative system makes buying stocks on margin look like child's
play. In the aftermath of the crash of 2008, the process of sorting it
all out and getting banks functioning again is something that markets
simply cannot do.
We are not even clear who owns what. The wise
guys on Wall Street invented a doomsday machine from which there is no
market escape.
In 1929 when the stock market crashed, the banking
system was relatively healthy. Bank customers played these speculative
games and took the losses, not banks. This time, the banks drank their
own Kool-aid.
It took until the awful winter of 1932-'33 for the
general depression to fully infect the banking system, and cause over
7,000 banks to fail. But Roosevelt's cure - deposit insurance and a
temporary bank holiday to sort out good banks from bad - quickly got
the financial system up and running again. Today, the banking mess is
still dragging down the real economy, with no effective cure in sight.
Wealth, Deficits, and Demand. The
economy now bears all the hallmarks of a depression. Between the
housing collapse and the stock market crash, American households are
out several trillion dollars (in the 1920s, there were no 401(k) plans
and less than 2 percent of Americans owned stock).
When people
are suddenly out a lot of money, they spend less. Weak demand in one
sector is cascading into other sectors. People spend less on autos, air
travel, hotels, restaurants, clothing - any optional purchase. Business
sales and profits are down, which causes other layoffs, and the cycle
deepens.
Roosevelt was said to be a big spender, but his biggest
peacetime deficit was only about 6 percent of GDP. This year, the
deficit will exceed 11 percent, and the recession will deepen all year.
It took the truly massive deficits of World War II - nearly 30 percent
of GDP - to finally end the Great Depression
A Debtor Nation.
America in 1929 was a major international creditor. Today, we are the
world's biggest debtor. The financial bubble created the illusion of
prosperity.
During the bubble years, the foreign borrowing
disguised domestic weaknesses, such as our much-diminished
manufacturing sector. For now, foreigners are still willing to lend us
vast sums, but that may not continue indefinitely.
All these
economic calamities have solutions, but each is more radical than
what's currently on offer. The government will have to temporarily
nationalize major banks, sort out good assets from bad ones, and then
return banks to responsible private ownership. To cure the housing
collapse, government should directly refinance mortgages, rather than
bribing banks to ease terms.
Deficits will have to be a lot
larger before they can get smaller. That should not require a war; this
is just as grave a national emergency. Those deficits could purchase
much broader prosperity.
This crisis doesn't yet have a name. It
has all the hallmarks of a depression, but people are understandably
reluctant to use the D-word. So let me suggest one: The Great Collapse,
since this was both a financial collapse and an ideological one.
Can
America recover from a Great Collapse? Can we avert a second Great
Depression? To coin a phrase, yes we can. But we need the right
strategies and we don't have much time.
Robert Kuttner
Robert Kuttner is co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. He was a longtime columnist for Business Week, and continues to write columns in the Boston Globe and Huffington Post. He is the author of Everything for Sale: The Virtues and Limits of Markets, The Stakes: 2020 and the Survival of American Democracy, and his newest Going Big: FDR's Legacy and Biden's New Deal.
This economic crisis doesn't have to be a second Great Depression -
if government does nearly everything right, and soon. But if government
doesn't do more, and fast, this could be worse than the 1930s. Why?
Three big reasons:
Finance: A Doomsday Machine.
The financial system is in far worse shape than it was when the stock
market crashed in October 1929. In the 1920s, there was a stock market
bubble, mainly because people could play the market "on margin,"
borrowing to invest in stocks. There were also scams like the original
Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to
enable the game, with low interest rates and few rules.
But
today, thanks to "securitization" of loans and the ability of insiders
to create exotic and unfathomable financial instruments, the
speculative system makes buying stocks on margin look like child's
play. In the aftermath of the crash of 2008, the process of sorting it
all out and getting banks functioning again is something that markets
simply cannot do.
We are not even clear who owns what. The wise
guys on Wall Street invented a doomsday machine from which there is no
market escape.
In 1929 when the stock market crashed, the banking
system was relatively healthy. Bank customers played these speculative
games and took the losses, not banks. This time, the banks drank their
own Kool-aid.
It took until the awful winter of 1932-'33 for the
general depression to fully infect the banking system, and cause over
7,000 banks to fail. But Roosevelt's cure - deposit insurance and a
temporary bank holiday to sort out good banks from bad - quickly got
the financial system up and running again. Today, the banking mess is
still dragging down the real economy, with no effective cure in sight.
Wealth, Deficits, and Demand. The
economy now bears all the hallmarks of a depression. Between the
housing collapse and the stock market crash, American households are
out several trillion dollars (in the 1920s, there were no 401(k) plans
and less than 2 percent of Americans owned stock).
When people
are suddenly out a lot of money, they spend less. Weak demand in one
sector is cascading into other sectors. People spend less on autos, air
travel, hotels, restaurants, clothing - any optional purchase. Business
sales and profits are down, which causes other layoffs, and the cycle
deepens.
Roosevelt was said to be a big spender, but his biggest
peacetime deficit was only about 6 percent of GDP. This year, the
deficit will exceed 11 percent, and the recession will deepen all year.
It took the truly massive deficits of World War II - nearly 30 percent
of GDP - to finally end the Great Depression
A Debtor Nation.
America in 1929 was a major international creditor. Today, we are the
world's biggest debtor. The financial bubble created the illusion of
prosperity.
During the bubble years, the foreign borrowing
disguised domestic weaknesses, such as our much-diminished
manufacturing sector. For now, foreigners are still willing to lend us
vast sums, but that may not continue indefinitely.
All these
economic calamities have solutions, but each is more radical than
what's currently on offer. The government will have to temporarily
nationalize major banks, sort out good assets from bad ones, and then
return banks to responsible private ownership. To cure the housing
collapse, government should directly refinance mortgages, rather than
bribing banks to ease terms.
Deficits will have to be a lot
larger before they can get smaller. That should not require a war; this
is just as grave a national emergency. Those deficits could purchase
much broader prosperity.
This crisis doesn't yet have a name. It
has all the hallmarks of a depression, but people are understandably
reluctant to use the D-word. So let me suggest one: The Great Collapse,
since this was both a financial collapse and an ideological one.
Can
America recover from a Great Collapse? Can we avert a second Great
Depression? To coin a phrase, yes we can. But we need the right
strategies and we don't have much time.
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