With cold, methodical clairvoyance, Paul Krugman has been chronicling our descent through subprime madness, into recession, into crisis, liquidity trap, and into the green shoots on the other side. He applauded Ben Bernanke‘s firmness and leadership in 2008, and warned very early in 2009 that the stimulus wasn’t large enough to do the job, that more spending would be (and still is) needed, and that plainly stated that the very worst thing policy-makers could do would be to repeat FDR’s mistake of 1937, when he cut spending and tried to balance the federal budget, and thus undid all the progress of his early years and prolonged the Great Depression. His column in the Times today is thus nothing short of sick-making: “We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer. But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.”
