Washblog

A deflationary crisis gives federal governments LOTS of room to maneuver. They can create LOTS of money and fund LOTS of programs - and nothing will work quickly enough. This means the tendency to think things through starts to diminish and we have to fight that.

And just to be clear, I believe the deflationary crisis cannot now be avoided if indeed it ever could have been. Everyone outside the government is acting exactly the way people act to create a deflationary disaster. Bankers (obviously), business leaders and even governors, mayors and county executives are doing exactly the wrong things and exactly the wrong time, as you would expect them to do. This is the initial stage of the deflation during which none of these people can see the collective result of his actions yet. Each institution looks to preserve itself without seeing that by doing the same thing at the same time they are bringing us all down. For example, by trying to "get ahead of the curve" and cut their costs with big initial layoffs, American businesses have assured that unemployment will rise above the level the financial system can withstand.

The federal government is trying to get ahead of the curve in the other direction, pouring out money as fast as it can. The problem is that the government is pouring out money in order to, in effect, prevent things that have already happened. The government has to get to a place where it can pour out money on the economy that will exist 6-12 months from now, not the economy that exists today or two months ago. The problem is that it is very hard to tell the voters that in a very short time, there will be fewer banks to rescue and in a very short time, there may be no point trying to prop up the market for consumer debt such as credit cards. Careless, reckless, "never, never" planning by the consumer credit industry means that around 10-12% unemployment, the backbone companies in that industry will start to fold. At that time the the federal government will run into a huge question: "Who in the world can we even lend money to?"

Right-wing ideology has blinded people to the obvious answer. In any economic crisis, you first lend to institutions that have the legal authority of taxation - the power to compel people to pay the money back. You lend to the states, cities and counties. You demand the highest standards of accounting, demand reform and then give them the money. It's just the wise thing to do. Then you lend to the institutions that have the best ability to pay the money back and can create the most economic benefit. You also do as much direct aid to individuals as possible, keeping in mind this unifying principle: ultimately, you are lending money to the people to put the life of the nation back together. They will do that through their bedrock institutions and through their own creativity and sense of purpose. You must give the people the capacity to build.

One of the great things that World War II did for America - in fact, the only great thing it did for anyone in the world - was that it gave the American people a task that was too huge for anyone to tell them how to do it. Everybody became an "entrepreneur" in the mission to beat the Axis, from the fellow with a rifle, to the lady with a riveter, to the folks with the slide rules, pencils and heads to scratch with them. The War made America realize that this was their fight - all of them. So we invested in soldiers who had only weeks before been unemployed young men nobody cared about. Business executives got off their high horses, popped the bubble reputation and asked "how can I help?". American women said: "give us the job" and this time, we gave it to them.

In more ways than one, the War was a war against the Depression. It was a horrifying way to solve a bad problem - the worst possible solution. Hopefully, we can look at that war, look at what was good in our nation's reaction and re-create that without the horror.