Robert Kuttner: Worse than 1929?

Roundup: Historians' Take

[Mr. Kuttner is the founder of the American Prospect and an economist.]

This crisis doesn't yet have a name. It has all the hallmarks of a depression, but people are understandably reluctant too use the D-word. So let me suggest one: The Great Collapse, since this was both a financial collapse and an ideological one.

This great collapse doesn't have to be a second Great Depression – if government does nearly everything right, and soon. And when we come out the other side, we could have a more decent and sustainable society.

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, we had 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 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 current 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 1932-1933 for the general depression to fully infect the banking system. Over 4,000 banks failed in that winter alone. 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. There were fewer bank failures after 1933 than in any year during the 1920s. Today, by contrast, the banking mess is still dragging down the real economy, with no effective cure in sight....
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