Ian Welsh Jun 29, 2010
The other day, Krugman wrote that we’re in the beginning of a new Long Depression.
Forgive me, but he’s wrong: this isn’t the beginning, it’s been going on for about two years now.
During a Depression there are periods where GDP grows. There are periods where jobs grow. It’s just that the periods of job growth don’t last.
There were opportunities to end the Depression before it really dug in its heels. The last one was at the beginning of Obama’s term. Kicking out of the Depression required two things.
The first was an adequate stimulus. This didn’t just mean a large enough stimulus, though the one offered was not large enough, it meant one properly constructed. Tax cuts for ordinary Americans are not stimulative, because folks like banks who have pricing power (you must have a credit card, loans, etc…) will simply take that money away by raising rates and fees. And it doesn’t mean short term shovel-projects, it means making commitments which will last for years so that businesses, when making plans know that hiring is worth it because those employees will be needed for more than a year or so.
Likewise the US has some serious problems with the structure of the American economy. The cornerstone of the stimulus had to be reducing US dependence on oil because as long as the US economy is so dependent on oil, full fledged growth is simply not possible. The days of $20/barrel oil aren’t coming back, and every time the price of oil gets too high, it puts great pressure on the US economy (and every other modern nation.)
The second thing which had to be done is to force the banks to actually eat their losses. Wipe out the shareholders and let the bondholders take their losses. All the money plunged into the banks (and it was much more than the TARP money, which was the smallest part of it) was wasted. Banks are not lending, and restoring lending is what the bailouts were sold as doing. Moreover they have raised borrowing rates and fees on those who need credit most, soaking up money which otherwise would be helping the economy rather than simply being sopped up to plug holes in bank balance sheets.
The trillions of dollars spent attempting to bail out the banks weren’t just wasted, by keeping zombie banks alive they made the situation worse. Further by not wiping out the wealth of banks and those rich folks who made foolish investments which wrecked the world economy, they created a political problem: to whit, as Durbin said””the banks still own Congress. (Along with the military industrial complex, pharma and various other monied interests). Because monied interests still own Congress, they have made it impossible to fix America’s structural problems.