How Will the Economic Crisis End?
by Robert Roy Pool
The global financial meltdown may be the most significant public crisis most of us have faced in our lifetimes. It has affected or will affect more people directly than the Viet Nam war, Watergate, the inflationary spiral of the late 1970s, the 9-11 Attacks, or the three Middle East wars we have fought since 1990. Depending on how much worse things get, it may impact many of our jobs, our homes, our retirement prospects, and our children’s futures. This is the big kahuna.
But unlike crises we have overcome in the past, this one is devilishly complex and fiendishly abstract. We are confused and angry. All this trauma inflicted by bad relationships between sets of numbers? How can this be?
We may have a rough idea how it happened (click here to see my earlier essay “What Happened to Our Economy?”) but we have no idea how it will end. There are so many conflicting opinions and so little we know for sure. In this essay I will clarify some of those issues.
Summary: Three basic alternatives have been debated for the final stages of this financial crisis: stabilization, deflationary depression, and inflationary recession. Three different methods for achieving stabilization have been proposed.
This article presents the arguments for all five of these scenarios, along with their most prominent proponents and the type of evidence supporting each.
Click here for a simple visual presentation about how the credit crisis began and spread.
(Thanks to Jonathan Jarvis jonathanjarvis.com)
Hope on the Horizon?
During the middle weeks of March the stock market rallied nearly 25 percent. The Obama Administration and the Federal Reserve attacked the economic crisis with vigor and determination never seen before in an economic crisis, promising to inject literally trillions of dollars of liquidity into the national economy if and when it becomes necessary. A successful appearance by Federal Reserve Chairman Ben Bernanke on 60 Minutes reinforced the Federal Reserve’s commitment to save Main Street from a depression, no matter what the consequences for Wall Street.
Treasury Secretary Timothy Geithner managed to silence critics temporarily by impressive performances in front of Congressional Committees. Geithner expressed unreserved confidence in the American people and the American work ethic, and impressed many with his positive, determined leadership. “Financial crises are brutally indiscriminate in the pain that they cause,” he said March 29th on Meet the Press, “and the burden falls not just on people who took too much risk, but also on people who were careful and responsible.”
If nothing else, Geithner has become much more assertive and articulate in the last two weeks. This helps.
Or More Doubt?
Yet serious questions remain about whether the structural issues that caused the financial meltdown have actually been resolved, or can be resolved any time soon, and whether the ideas currently employed by the Administration are, in fact, the most relevant ideas for this crisis. Well known economists have taken all sides in this dispute, leaving non-specialists bewildered. What ever happened to the idea that economics was a science? Apparently that notion has been consigned to the dustbin of history, along with its two most famous theories, Marxist-Leninism and Free Market Fundamentalism.
How will this economic crisis end? All of the theorizing boils down to essentially three schools of thought, and three resulting scenarios: stabilization, deflationary depression, and inflationary recession. Prominent economic thinkers make the case for each of these three alternatives.
Since stabilization is by far the preferred outcome of most economic theorists, three different "flavors" or approaches to stabilization have been proposed, each spear-headed by a famous spokesperson. I will review their arguments, identify the issues on which they clash, and offer a few of my own ideas about how we might decide which of these alternatives is most likely, bearing in mind that there are many aspects of this crisis that cannot yet be known.