THE NATION: ….As almost everyone understands, nothing substantial will be accomplished this year. President Obama is campaigning on warmed-over optimism and paper-thin policy proposals. Republicans propose to make things worse by drastically shrinking government spending, when the opposite is needed to foster a real recovery. The president, like the GOP, embraces large-scale deficit reduction. In these circumstances, it’s just as well that the two parties cannot reach agreement. After the election they may make a deal that splits the difference between bad and worse. In the worst case, they might inadvertently tip the economy back into recession…
Japan in the 1990s is the appropriate comparison. After its financial bubble burst, Japan saw its “lost decade” stretch into fifteen years of stunted growth. Its central bank responded hesitantly, and its monetary policy proved ineffective—rendered impotent by a “liquidity trap,” a condition identified by John Maynard Keynes. The United States experienced a similar fate in the Great Depression of the 1930s. As an economics professor, Fed chair Ben Bernanke is a scholar of that period. He is determined not to let it happen again. A decade ago, he scolded Japanese authorities for failing to be more imaginative and aggressive. They needed “the courage to abandon failed paradigms and to do what needed to be done,” Bernanke advised. His model was Franklin Roosevelt, whose “specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—in short, to do whatever was necessary to get the country moving again.” …
The august central bank is engaged in a startling role reversal. It has turned left, so to speak, abandoned old positions on fundamental matters and endorsed Keynesian principles it once spurned. Bernanke would doubtless protest that this is not about left or right, that the Fed is simply doing what it’s supposed to do in a crisis—using the stimulative power of money creation to act as “lender of last resort.” Nevertheless, for nearly three decades, first under Paul Volcker and then Alan Greenspan, the Fed did pretty much the opposite. It was the conservative authority that dominated policy-making, scolding politicians for their spending excesses and threatening to punish over-exuberant growth by raising interest rates… (more)
EDITOR: Actually it was the massive deficit spending commenced in 1944 that stimulate the economy ouf of the depression. New Deal efforts almost accomplished a recovery in 1936 but then, misguided efforts to balance the budget plunged the nation back into depression in 1937.
