Thursday, March 19, 2009

Normal May Be a Ways Off

In the cover story for the next issue of the Washington Monthly, James Galbraith, a University of Texas economist and senior scholar with the Levy Economics Institute, has a sobering analysis of the economic situation we now find ourselves in, just how serious the economic crisis is, and why the current plan may be well short of an effective solution.

In short, if we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression. And this can only be done by qualitative and historical analysis. Our modern numerical models just don't capture the key feature of that crisis -- which is, precisely, the collapse of the financial system.

If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work?

It is not pretty and discusses how a lot of the plans and assumptions are based on economic models that don't really address the complexity of the situation as it now stands. The key assumption, that of a self-stabilizing economy, is at the root of why this recession is no like the other post war recessions. Bascially, Galbraith believes that the "return to normal" is off in the distance, and the steps taken by the White House, so far, are going to come up short...way short.

If Galbraith is right, and his arguments make sense, it means that tens of millions more Americans will be out of work over the next five years, regardless of the current stimulus. It means that the big banks really are failed and worthless and that they will never resume normal lending in spite of how much money the Treasury pumps into them. It means seriously bad times.

Galbraith just doesn't talk gloom and doom and does offer some recomnendations for a more comprehensive approach... This is definitely worth a few minutes of your time.

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