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 The latest issue of Time magazine features a photo of a 1930s soup line with the words "The New Hard Times" emblazoned across it, asking in smaller print whether we've reached "The End of Prosperity?" Curiously enough, the word depression, the dreaded "D" word, appears in smaller type near the bottom of the cover, and is easy to miss. Ready for the gas pipe now? Well, as dire as that cover seems, the story it refers to, by Harvard professor Niall Ferguson, offers a very different picture. It turns out that Ferguson is no Nouriel Roubini, the New York University economist commonly referred to as Dr. Doom. In other words, Time is engaging in depression chic. And in fact nothing concentrates the mind more than images of soup lines, apples sellers and Okies fleeing the dust bowl. So prepare yourself.
Ferguson's Time story tries to explain the causes of the Great
Depression in an easily digestible form. Fergusson argues that one of
the biggest policy mistakes was the initial inertia of the Federal
Reserve to act at all. Instead of loosening, it tightened credit,
triggering massive bank failures. Ferguson then contrasts this inaction
with today. Fed Chairman Ben Bernanke famously studied the Great
Depression, and has taken an activist approach, which Ferguson terms
the Great Repression. Is Bernanke's Great Repression really working to stave off what
Ferguson calls Depression 2.0? He seems to think so, though other
academics don't agree. A report from the International Monetary Fund is warning the world that the U.S. is in store for a bad recession. The IMF report offers a stark view of where we may be heading. According to the blog Real Time Economics, Charles Collyns, deputy director of the IMF research department, said in a briefing that it's clear "that we are seeing the most dangerous shock to the mature financial markets since the 1930s, posing a major threat to global growth." Like Time, Collyns alludes to the Depression, but he doesn't
predict one. So what's the difference between a bad recession and a
mild depression? The National Bureau of Economic Research, or NBER,
defines a recession as: A significant decline in economic
activity spread across the economy, lasting more than a few months,
normally visible in real GDP, real income, employment, industrial
production, and wholesale-retail sales. Now, consider an economic textbook definition of a depression:
Luckily, we can only answer yes to a small number of those signs.
But if there is a silver lining -- for Wall Street at least -- in media and academics throwing around the "D" word, it may be that it helped to sway some House members to change their vote on Friday leading to the approval of the $700 billion bailout bill. But is that the silver bullet that will solve the crisis and avert a depression or a Japanese-style Lost Decade that the IMF warns about? Well, it really depends on who you ask. Some have warned that the bailout could lead to unintended consequences that could add more check marks on our depression check list.
Take for example Nobel economist and former Clinton economic adviser and IMF chief economist Joseph Stiglitz, who wrote about the bailout: The unemployment rate will still
increase, growth will remain anemic, house prices will continue to
fall, the number of houses in foreclosure will continue to rise, credit
will be harder to get, states and localities will remain in a fiscal
crisis, and there will be cutbacks in basic public services. ... Our
living standards in the future will be lower than they otherwise would
have been. It certainly sounds as if he's checking everything off on the list, though he's not clear how bad each of those maladies will prove to be. Stiglitz isn't the only academic blogging advice. Nearly every
day Roubini offers another reason why House members were right to
oppose the bill the first time around on his Web site RGE Monitor. As for the folks at the IMF, they refuse to address the topic
directly until next week's World Economic Outlook summit. Don't be
surprised if some of them use the dreaded "D" word. - Matthew Wurtzel Matthew Wurtzel is the editor of Dealscape. Categories Deal Video
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