Paul Krugman's horror story

http://www.swamppolitics.com/news/politics/blog/2008/12/paul_krugman_rocking_the_house.html

Paul Krugman's horror story

Posted December 21, 2008 9:28 AM
The Swamp

by Frank James

Paul Krugman is one of the smartest, most entertaining economists alive which explains why he may the best known too,

The New York Times columnist and Princeton University professor appeared at the National Press Club in Washington Friday, fresh on the heels of receiving his Nobel Prize. And he simultaneously scared the audience out of its wits and left them laughing and wanting more, not a bad achievement for a practitioner of the dismal science.

A few important Krugman points:

The stimulus is going to have to be extremely big to work. It takes about $200 billion of well-spent federal stimulus to drop unemployment one percentage point. He thinks unemployment could hit 10 percent before things turn around. So that argues for a $1 trillion stimulus not over two years but faster.

we'll have that trillion dollars in a jiffy.

If I was a betting man I would place my wager with Krugman's recommendations. I think he is a reasoned, intelligent economist who understands the gravity of our current situation. I also think he understands the triggers that will result in a lessening of these economic tensions.

The largesse of his recommended stimulus would normally be a cause for concern both because it promotes inflation (lots of dollars chasing a finite number of goods) and a weakening of the dollar on world markets. But at this point we are experiencing deflation, where the cost of goods and services is declining so inflation is not an immediate threat. The Fed and other policy makers will need to watch this going forward. As for the downward pressure on the dollar, it can actually be a net positive especially if domestic energy demands remain tempered. To the extent we export goods and services, the lower valued dollar will make U.S. exports cheaper which employs more workers. At the same time it makes imports more expensive. That is also good because it deters consumers from purchasing foreign made goods (unless of course like the Chinese they engage in "dumping" in our domestic market).

I say...go for it Paul. Promote it to Obama and gain allies in the new administration. God knows we can all use all the help we can get.

all you need to do is look - this crisis is all about bad debt.

The thing that caused the problem is not the solution to the problem.

The solution to the problem is to eliminate the source of the debt-based economy, which is fractional reserve banking, an essentially fraudulent practice in which a bank can issue promises to pay against money it knows it doesn't have... and do it ten times over. Regulation can't help because our lawmakers can't be trusted not to be on the take, bribed by the very same people they might theoretically attempt to regulate.

Hold bankers and public corporations to the same laws against financial fraud that bind you and I, and we'll see trust return to the system - and thereafter some real economic growth based in real productivity, not just the phantom thereof created the accumulation of debt. With so little trust out there, "off-balance sheet" bullshit and Fed opacity sure doesn't help. Nobody smart is going to trust a dollar to the financial sector under these conditions.

http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression

Hoover's stance on the economy was based largely on volunteerism. From before his entry to the presidency, he was a proponent of the concept that public-private cooperation was the way to achieve high long-term growth. Hoover feared that too much intervention or coercion by the government would destroy individuality and self-reliance, which he considered to be important American values. Those ideals, as well as the economy were put to the test with the onset of The Great Depression. At the outset of the Depression, Hoover claims in his memoirs that he rejected Treasury Secretary Mellon's suggested "leave-it-alone" approach.<22> Critics, on the other hand, accused Hoover of sharing Mellon's laissez-faire viewpoint. It is often inaccurately stated that Herbert Hoover did nothing while the world economy eroded. President Hoover made attempts to stop "the downward spiral" of the Great Depression. His policies, however, had little or no effect. As the economy quickly deteriorated in the early years of the Great Depression, Hoover declined to pursue legislative relief, believing that it would make people dependent on the federal government. Instead, he organized a number of voluntary measures with businesses, encouraged state and local government responses, and accelerated federal building projects. Only toward the end of his term did he support a series of legislative solutions.

In 1929, President Hoover authorized the Mexican Repatriation program. To combat rampant unemployment, the burden on municipal aid services, and remove people seen as usurpers of American jobs, the program was largely a forced migration of an estimated 500,000 Mexicans and Mexican Americans to Mexico. The program continued through 1937.

President Hoover, in 1931, urged the major banks in the country to form a consortium known as the National Credit Corporation (NCC).<26> The NCC was an excellent example of Hoover's belief in volunteerism as a mechanism in aiding the economy. Hoover encouraged the member banks of the NCC to provide loans to smaller banks in order to prevent them from collapsing. Unfortunately, the banks within the NCC were often reluctant to provide loans, usually requiring banks to provide their largest assets as collateral. It quickly became apparent that the NCC would be incapable of fixing the problems it was designed to solve, and it was abandoned in favor of the Reconstruction Finance Corporation.

By 1932, the Great Depression had spread across the globe. In the U.S., unemployment had reached 24.9%,<27> a drought persisted in the agricultural heartland, businesses and families defaulted on record numbers of loans, and more than 5,000 banks had failed.<28> Tens-of-thousands of Americans found themselves homeless and they began congregating in the numerous Hoovervilles (also known as shanty towns or tent cities) that had begun to appear across the country. The name 'Hooverville' was coined by their residents as a sign of their disappointment and frustration with the perceived lack of assistance from the federal government. In response, President Hoover and Congress approved the Federal Home Loan Bank Act, to spur new home construction, and reduce foreclosures. The plan seemed to work, as foreclosures dropped, but it was seen as too little, too late.

Prior to the start of the Depression, Hoover's first Treasury Secretary, Andrew Mellon, had proposed, and saw enacted, numerous tax cuts, which cut the top income tax rate from 73% to 24%. When combined with the sharp decline in incomes during the early depression, the result was a serious deficit in the federal budget. Congress, desperate to increase federal revenue, enacted the Revenue Act of 1932. The Act increased taxes across the board, and the percentage increased with income, to near pre-1928 levels for top income earners. It also implemented a 13.75% tax on corporations.

The final attempt of the Hoover Administration to rescue the economy was the passage of the Emergency Relief and Construction Act which included funds for public works programs and the creation of the Reconstruction Finance Corporation (RFC) in 1932. The RFC's initial goal was to provide government-secured loans to financial institutions, railroads and farmers. The RFC had minimal impact at the time, but was adopted by Franklin Delano Roosevelt and greatly expanded as part of his New Deal.

--snip--


Unemployment rose to 24.9% by the end of Hoover's presidency in 1933, at the depth of the Great Depression. Notwithstanding his latter actions such as the Revenue Act of 1932, which had negative effects on economic growth, the business cycle began to turn and joblessness steadily decreased over the next four years before it rose dramatically again under FDR's confiscatory and pro-union policies.

and given that Bernanke is an expert on the depression, one has to wonder whether this was engineered.

Lets see, $1,000,000,000,000/300,000,000 = $3,333,333

...which isn't the best way to stimulate the economy, and from the Pentagon and the MIC. Interesting how closely the U.S. experience is mirroring the Soviet Afghanistan debacle, isn't it? Runaway military spending and foreign aggression is bankrupting the U.S.

Plus cutting the $1 trillion defense budget by 70% would clean up the books.

ANSWER: Much sooner rather than later. Wonder if the poor house accepts worthless paper for a hot meal? These are the end financial times.

infrastructure jobs are nice- but they eventually go away.

If cars are going away, we need to manufacture their replacement.

We also need health provider jobs and education/training jobs too.

Let's hear it for "FDR's confiscatory and pro-union policies".

Dividends should be taxed at the same rate as wages, for starters..