Also not being an economist, I have no useful comment to add. But I would like to express my appreciation for the quality of thought that has gone into this and the previous comments on the present economic crisis. When the stock market declines almost 50% for only the second time in 183 years, one looks, desperately, for plausible accounts of what is going on.

This blog has been most helpful in thinking about the crisis. As a true public good, I suppose it can only be "repaid" by the esteem in which it is held by its readers. I certainly want to participate in that.

Public works is throwing good money after bad. If it was good for the economy, it would be profitable, and if it was profitable, the government would not need to subsidize it.

Filling potholes may employ some people, but it is not good for the economy, especially when financed through debt.

Our only solution at this time is general debt forgiveness. We need to unhitch the real economy from the dysfunctional banking industry. When linked, a deflation will destroy both. We can survive deflation, but not with a debt load.

A Jubilee Year debt cancellation would both reset the banking system, and stimulate the real economy.

There's a perfectly logical definition why we don't want to label this downturn a depression now - some people behave irrationally, and others are rationally ignorant of macroeconomic terminology and would assume that we are really in 1929. Seems to me like the last thing you want to do DURING a downturn/crash/depression/recession is give people another reason to panic and liquidate their 401K near a market bottom.

After the economy recovers, if you want to go back and label this a depression - fine, might serve some purpose. But now doesn't seem like the best time.

One, I echo Mr. Rekdal's comments.
Two, a massive public works scheme, similar to what existed during the Great Depression, appears to have had--at best--a marginal benefit in lifting the country from that predicament. Here are some salient facts: 1) it was not until World War II that the effects of the Great Depression came to an end; 2) the "alphabet soup" agencies and their overregulation of the economy led to a separate recesssion in the late-1930's; and 3) the stock market did not return to pre-1929 levels until the 1950's.
Turning the government into a "consumer" is yet another way by which the idea of limted government becomes a vestige of a bygone era, and overreaching government becomes the order of the day. As in the 1930's when "emergency" legislation was passed only to eventually become permanent, who among us actually believes that the massive governmental encroachment expected to come about in an Obama administration will recede once the emergency ends?

I wonder if Mr. Posner, not being a "macroeconomist," is aware that he is spouting Keynesian economic theory, which has been discredited every single time it has been tried, and has failed to predict every major economic event of the 20th century. I suspect so. I also suspect that the neo-Keynesian school of Do Something is about shoring up the self-esteem of statists and statism's sympathizers, not an honest attempt to save the economy.

Since you are not a "macroeconomist," Mr. Posner, let me recommend to you Economics in One Lesson by Henry Hazlitt.

Everyone can be sure that Richard Posner is apprised of Keynesian theory and could no doubt teach Hazlitt this afternoon without notes. I infer that he fears we are in a very bad situation that will likely get worse. He is simply trying to suggest some actions that might be helpful in mitigating the carnage that is coming. Our social structure is not rugged and it will not take much to prick an implosion. A good fight plan lasts until you get hit in the teeth; so it is with economic theory. Theory that does'nt predict or point the way out of our predicament is for entertainment only.

"In the third and most interesting type of depression, illustrated by both the depression of the 1930s and the current depression, the cause is the bursting of an investment bubble."

Sir, it is my humble understanding that the Great Depression was caused not so much by the stock market crash, but by the Federal Response, which was to increase bank Reserve Requirements. This measure, meant to prevent bank runs by allowing people greater access to their bank account assets, led to a cataclysmic contraction of the credit market, a 'credit supply shock' if you like. I do agree that the two events you refer to had a common cause: neither the people buying stocks on margins with money backed by the value of their homes in the 20s and 30s nor the those who in the past few years traded Sub-prime Mortgages packaged like bonds, and created 'exotic securities' to defray the risks associated with them fully understood what they were doing, namely what the assets they were toying with were actually worth. Nor did they understand what would happen if their loans were called in.

I hope that makes some sense.

For the occasion (not often), I agree with both Becker and Judge Posner who may not have his macroeconomic ticket but who nevertheless thinks and writes quite clearly. I do have an observation and one question; the first two types of "depressions" descibed by Judge Posner are what mathematicians call nonlinear ocillations like the ocillations or cycles one sees in prey-predator population cycles. The third type of depression decribed is a nonlinear ocillation disrupted by external stimuli and cannot be normalized quickly by withdrawing the interference although that is necessary.

My question to anyone who cares to answer it is; Where is the government going to get the money to fund the public works program? Print it?, Borrow it? What will either do to the dollar? To inflation? It is also fairly well accepted that FDR's WPA didn't do much to revive the 20s depression. What is different now? While that was a "stock" bubble, isn't a bubble a bubble?

I know, that is more than one question. Sorry.

As an all but dissertation economist, an applied macroeconomist to be precise, I found Posner's explanation of current economic thought to be straitforward and accessible. However I was somewhat taken aback by the previous two comments.

Robert is clearly rehashing the central points argued by Amity Shlaes in Forgotten Man. As pointed out by others, Ms. Shlaes misunderstands and misrepresented the basic tenets of Keynesian economics. I would further note that she has little formal background in economics. Read her book with a huge grain of salt (a boulder in fact).

Wendy is quite incorrect in saying Keynesian economics has been discredited and has failed to predict major economic events. New Keynesian economics is perhaps the dominant school of macroeconomics right now and is exemplified by the likes of Joseph Stiglitz, Paul Krugman, Gregory Mankiw, David Romer, Christina Romer, Olivier Blanchard, Jordi Galí, and Michael Woodford. Paul Krugman first warned about our current crisis over three years ago:

http://www.nytimes.com/2005/08/08/opinion/08krugman.html?ei=5088&en=7125767d2baf3fae&ex=1281153600&adxnnl=1&partner=rssnyt&emc=rss&adxnnlx=1228755614-wVSi2jBlcufxRr79BELvbg

It is in fact the Austrian economic school, of which Wendy is clearly an adherent, which is discredited. It is little more than an intellectual curiosity and has little in the way of scholarly achievements. It is nowhere an accepted school of macroeconomic thought with perhaps the exception of George Mason University. The best criticism I've read of the adherents of the Austrian school was by none other than Paul Krugman:

"Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors."

My advice is when faced with a grave crisis and someone tells you to "don't do something, just stand there" you should regard them with suspicion. They've probably been reading too much Ludwig von Mises.

So many people in my opinion misdiagnose the source of the credit market over-extension.

Savings does not come from frugal households per se; savings comes from flow imbalances in the real economy - too many nodes receiving more income than they plan to spend.

In the case of the US, the wall of liquidity arises from household income polarization and the large trade deficits. The latter alone implies that more than 6% of GDP must be "processed" by the financial economy annually.

Now financial markets are good at finding a credible borrower for some quantity of savings, but what happens when financial markets become saturated? Declining lending standards, temporarily self-reinforcing asset bubbles, etc. In a word: 2008.

It will be interesting to see how or whether the current train wreck can unwind without adjustment of the underlying income imbalances in the real economy.

Capital kept away from the wasteful & inefficient hand of government will spark greater investment & create more jobs. Should we put our money & efforts into creating temporary, “make work” government jobs, or should we try to generate lasting, private sector jobs that augment our nation’s wealth?

Government improvidently steered capital into the housing market, until it collapsed under the weight of recklessness. Now, it wants to plan and oversee recovery? If it does, Government incompetence in directing capital will delay recovery by years.

Instead of solving the problems of their businesses, executives are standing in handout lines to see what freebees the Government might unthinkingly award them. The specter of bailout is forestalling recovery.

I have somewhat of a corollary to Jim's first question. Since a large scale economic stimulus package and auto industry bailout are inevitable, are there steps that can be taken to minimize the problems associated with these measures, such as future inflation, moral hazard, etc?

I understand that these concerns do not overcome the need for drastic short run measures, but I don't think it follows that we shouldn't be concerned with them in the way we structure programs.

As a civil engineer working specifically in public works projects, I'd like to make 3 observations:
1. The amount of sewer, water, electrical and transportation projects built in the 1930's and is still in use today is staggering.
2. Infrastructure like these are the foundation of our economy, and without these projects in the 1930's the post WW2 growth would have been delayed at the least, so it must be looked at as an investment rahter than an expense.
3. Infrastructure has a life span, and even with proper maintenance (which has generally not been done in order to keep taxes down - google "ASCE report card") it will need replacement. Design life span is usually between 50 and 100 years (what timing!).
4. Finally, investing in projects that actually put folks to work has a multiplying effect: taxes get paid, debt defaults might slow down, slack gets taken up in the supply of things, etc.

Sooner or later, bailing out the boat is no longer feasible, and you have to build a new one.

Considering that there is at least one additional type of depression one wonders at the credibility of thought here. The additional type is a forced depression by one country instigating a financial attack against another or against a group of countries.

There is credible circumstantial evidence that the 1930 depression was caused by such an event. The situation following WW1 had at least two players who had interest in destroying western financial markets – the Germans to get out of the Treaty of Versailles and the Russian with the advancement of Communism. Significantly fanatics representing of either or both of these countries could have initiated such an attack with out direct government knowledge of action so one can not dismiss such thought on the bases of lack of official government action. As far as security such attack like the attack on Mumbai can be imitated by a very small group given sufficient resources.

Again, at the current moment of time, there are sufficient piratical knowledge of how the system was brought down that an outside attack can not be dismissed unless of course one has information not available to the general public which excludes such which is doubtful.

If of course one’s interest is in how to restart the world economy and return it to previous levels of activity that is a different but strongly related is in that how it became broken has no direct bearing on how to fix it but how it became broken does have a direct relation to fixing it if the how is a recurring event the keeps the fix from happening.

The one thing that is definite is that without including such thought in your analysis grave questions are raised about the quality of analysis.

"why that word has been displaced by "recession" eludes me--who is supposed to be fooled by such a euphemism"

As I remeber it from the early 1940s, we started saying 'recession' because what happenned around 1938 was clearly different from and much less bad than the Depression which happened around 1931-33.

"American government tends to be extremely sluggish."

As an old govenment servant, I know that is true; and not only of US government. Obama's people seem to be aware of the problem. They are talking about a lot of spending on energy efficiency - which means insulation in the short run which can be installed with minimal lead times; of school building renovation where many School Boards will have ready but postponed projects; and of transport infrastructure where the engineers have long and thought through lists of overdue major maintenance, replacement and improvement. And remarkably little of this is likely to prove to be waste if we take a perspective of a decade or two.

Moreover, consumer durables are more durable than they used to be, so that replacement can be deferred longer than used to be possible.

That has not been my experience, especially since the complexity of many durables make it cost-prohibitive to fix them, which results in higher turn-over. Have you seen many electronic repair shops around? One other example: Low cost auto repair has been priced out by the expensive technology required to diagnose and fix modern cars. Is there any broad evidence on this point?

To all the nay-sayers about the failure of the Government intervention during the Great Depression through the likes of the NRA and WPA. No one seems to realise that these Operations were essentially gutted by a Conservative Supreme Court and so did not have the intended positive impact on American lives or the economy and we had to wait for WWII and another Federally sponsored economic stimulus package.

As for BJ's comment, there is much truth to it. In addition to the simple Civil Projects discussed, we also need to upgrade our Mining and Refinery Complex's to further our Energy independence. How about the Tran's Canadian Pipeline? That's about a few billion dollars injection into the arm of a sick economy. It'll have more impact than bailing out Investment Bankers.

Now my inner curmudgeon is going to show. I will take my microeconomics and that of millions of others to anyone's macroeconomics as follows: I don't trust the feds to staighten this out because they helped get us into this. I don't trust the banks to get us out of this because they helped get us into this. The same for the investment bankers, the mortgage brokers, Fannie Mae and Freddie Mac, the oligopolies in industry, the speculators, the real estate and developer community, etc. I am not spending anything, going anywhere or doing anything and feel fortunate to have a job. I will change my miserable, selfish attitude when the politicians get real jobs and occasionally take office to serve the public interest and when the outrageous salaries of the highly paid executives approach something like 10:1 to their employees. I wonder why people move to one of the 30,000 gated communities in the US. Probably because they don't trust the state to provide basic services. I bet that many of them feel the same way I do.

Jim, Those gated communities are still dependent on Public Services like Water, Sewer, Gas, Electric; that you, I and them underwrite. Although, "They's" percentage of underwriting based on gross income is considerably less than you or I pay. Besides, those gates are there simply to keep the likes of you out.

Welcome to the New America!

Neilehat,

That is OK since "the likes of me" doesn't want to live there anyway. I like being "gateless". Cheers!

Why are we even discussing this stuff when the Govenor of Illinois was just taken away in handcuffs for trying to sell Obama's senate seat to the highest bidder and offering to help the Tribune Company finacially in return for firing critical editorial board members. Yes sir, I am going to depend on the government for my welfare. NOT. Economy? What economy? The County of Cook takes a 10% sales tax on merchandise that brings the manufacturer or distributer 3-4%. And we wonder why the business cycle is aberrant. Human? I am not sure.

To all the nay-sayers about the failure of the Government intervention during the Great Depression through the likes of the NRA and WPA. No one seems to realise that these Operations were essentially gutted by a Conservative Supreme Court...

The NRA was declared unconstitutional by the Supreme Court, but I don't think they ever acted against the WPA. Can't blame them for the failure of make-work to end the Depression.

It was good that they brought an end to NRA, which did one of the most destructive things a government can do: interfering with the price mechanism.

depression (why that word has been displaced by "recession" eludes me--who is supposed to be fooled by such a euphemism?)

I agree with those who've commented that it's useful to have different terminology for more-severe and less-severe downturns. But overall, I prefer Ronald Reagan's definitions:

"A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his."

Jim, This is Illinois! What other State in the Nation uses it's Courts so freely to discipline or pillory it's Politicians. There is a very good chance that this is ploy by the State Republican Party to "get" a Democratic Governor. Btw, the Court has already released him on his own recognizance. Remember, "Graft and corruption is the lubricant of the political machinery". Jim Ryan found out about that too. I believe the Republican President will pardon him on the way out.

Richard, BTW, I hope you lose your job, if you have one. Then come back and talk to us about the evils of a National Recovery Act.

Illinois gubernatorial candidates should just spend a few years in the federal pen to get it out of the way before taking office. Kerner, Walker, Ryan and now Blago. I wouldn't mind if they were competent but corrupt or incompetent but honest. But incompetent, corrupt and stupid? That's too much.

Jim, you surprise me. What's wrong with letting the free market decide the seat! The Governor is obviously too stupid (assuming the indictment is remotely accurate).

Daniel, I suspect that the real problem is not the free market versus regulation. More likely it is human nature run amok. If we had decent, self- regulated folks with a conscience running the government and our oligopolies, there might be fewer indictments and bailouts.

Jim, I've read the charges, most sound rather spurious to me. However, the Tribune has got a bug up its butt about the Gov. as well as the Gov. for the Tribune. From what I've been able to gather, the Fed's indictment is based on "investigative reporting" released to it by the Tribune. This may have something to do with the State backing out of negotiations with the Tribune Co. to purchase Wrigley field ( with the Tribune Co. going into bankruptcy and all). Perhaps a ploy by the Tribune to increase circulation? Ahh... Illinois politics.

The proposed infrastructure spending would not be as effective today as it was in the 1930s, even if it was effective then. Back in the day, you basically just went out and built a road.

With today’s environmental gamesmanship, ‘safety’ regulations, labor arrangements, the EEOC, helpful government employees, political favors, etc, etc., I doubt that one third of the money would go into asphalt and concrete to benefit the economy.

If the President-elect were true to his claim to be a champion of the environment and energy independence, I’d like to propose a better plan. One that would reduce our dependence on foreign oil, reduce greenhouse emissions, and set the stage for future electric cars.

We should use this situation as an excuse to waive wasteful and burdensome government regulations. Then we should build nuclear power plants by the dozen, and electrify the nation’s railroads.

What makes this downturn - I suspect it will be called a depression before we are all said and done - dangerous is that it has several interlocking components. Each of these would normally cause economic contraction. Together, they feed on themselves. The result is that we are seeing a number of things that are "not supposed to happen" and which our decisionmakers have not seen in their lifetimes.

If you would ask economists what effect any of the following would have on the economy:

(a) $140 crude oil
(b) a major downturn in household equity and buying power
c) the implosion and Chapter 11 of a major Wall Street bank
(d) sustained job losses of over 200,000 per month
(e) credit panic brought on by, say for argument, massive accounting scandels at a number of U.S. and global commercial banks that would force bailouts, nationalizations, and mergers
(f) A non-functional real estate market

The response would be that (a) through (f) would at least cause a slowdown if not an outright contraction. It's possible to conceive of something that would involve one or at most two of those, because they generally haven't happened in the past. The tech bubble took out household equity and caused large job losses, but it didn't damage most real estate (certainly nowhere near this scale) or really injure Wall Street banks.

What we have now is a burst credit bubble that was inflating the negative savings rate's buying power and the economy as a whole. Our economic growth during this bubble was mediocre at best. The excesses of the credit bubble were outragous and supportable only by their own momentum. It became literally impossible for people of upper middle class income to own real estate in certain parts of the country without stupid exotic mortgage products.

The credit bubble - and its idiot loans - only existed due to securitization. If you have to carry some of this garbage, you write less of it and you start writing to higher standards so you don't get a visit on FDIC Friday. The belief that developed that "no one will lose" on defaults on underlying mortgages that were idiotic is contrary to economics and market principles. Someone paid way more than that asset was worth.

Well, now we know what happens when house prices stop going up at a rate grossly exceeding income growth. We also know what happens when we "test" the idea of "too big to fail." Lettling Lehman go was disasterous. Letting Lehman get to the point it did where its peers flat-out refused to buy it out of self-perservation was equally disasterous.

What we have now is a number of things tied up in the credit/housing downturn that are feeding and cascading off of each other. None of them are healthy for the economy. The accelerating trend of job losses - driven by collapsing revenue and a lack of affordable credit - makes housing worse. No mortgage rate is affordable if you have essentially no savings and no job. Job losses also, as pointed out by Posner, feed into contraction in retail spending and further contraction in corporate revenue. The net job losses in the retail sector are going to be ghastly this holiday season.

At present, a lot of these horses have left the barn. What are probably the best targest for trying to halt the death spiral are

(1) Doing something to halt the job losses. That includes not letting the automakers go into an uncontrolled Chapter 11; this will directly destroy Michigan, Ohio and Indiana and cause collateral damage throughout the United States. On the actual jobs, stimulus needs to target employment, up to and including make-work. I don't like this term, as we really do need infrastructure work done as it stands.

(2) Pre-empting the impending disaster with Option ARM resets. If Option ARM defaults go the way they can be expected, they will cause further depression on house prices, more foreclosures and more worthless credit securities and the cascade goes on.

Quinn, "News Flash": House Republicans and other "Free Marketers" torpedo first steps to a National Recovery Act. Automakers begin to roll out Project "Every Man, Woman, & Child for themselves". Begin to expect the unemployment rate to spiral upwards of an extra 10-20 percent. Expect retail sales to collapse, expect foreclosures to climb for all types of property.
Expect more Banks and Financial Institutions to move into receivership or outright collapse.

On the International Front, Riots begin to sweep across Europe as legions of unemployed take to the Streets.

And the Band plays on ...

These are not good signs.

Judge Posner, thanks for an interesting essay.

We tried monetary policy: but the monetary bailout did not work and it grossed us all out: the very idea of giving money to banks reminded me of Mr. Creosote in the Monty Python movie The Meaning of Life; I'd best not recount the details of the scene.

There are multiple types of monetary policy and the most traditional form, call it Stalinist, may not work. Big iron projects will employ ironworkers. What about teachers?

The next most traditional form, call it bright iron, might work better and be easier to start. Perhaps we should give everyone broadband first: as George Gilder has pointed out recently on the BBC, this might change the rules so dramatically as to pull us out of Depression without a war.

What if all job seekers had perfect information and could work remotely, not just the favored few?

But the next type of stimulus might be best. A fraction of the original 700B bailout, if simply given as a dole not only to the registered unemployed but to any layabout, any flaneur, who applies, would have been and could still be the cheapest and most dramatic stimulus, as long as there was a time limit on this temporary reign of Cockaigne, this holiday Big Rock Candy Mountain.



Keynes himself suggested that the unemployed be set to digging up gold bars, so perhaps some temporary corvee could be assigned the beneficiaries.



To be unlike the crudest form of Peronism, my fanciful program would have to be time-limited, like FDR's bank holiday.



Truth and reconciliation would indicate that most of the populace has been not enriched but instead dispossessed by the last thirty years. According to the CIA's own figures, for every computer millionaire who cannot program a computer, there are at least four hard-working programmers who don't have medical insurance.



And, with all due respect, Judge, talking heads and de facto intellectuals (including anti-intellectual intellectuals) need to admit that during the fat years, they saw no need whatsoever for government intervention. Now it may be too late.

I think there may have been an oversight made at the time of the bank bailout.



Suze Orman is "just" a pop financial guru. Nonetheless she wisely has pointed out to her adepts that when they lose their home in a disaster, or send the keys back to the mortgage holder, they have NOT escaped obligation under the law.



Many people seem to believe they have, even the banks, which are laying their back-office people off when those folks could be on the phone making money by collecting money owed, or mowing the lawns of the houses the banks now own.



Sure, create jobs for the deadbeats. But make them pay what they owe. This can restart the engine.

We don't need a "jubilee". Quite the reverse.


I think it's less important that Americans don't save than that they don't actually work. The negative savings rate was caused by the savage absence of medical insurance in some measure, and by the savage absence of mass transit in more.


The problem is that "diligence" became a lawyer's term for pretty paperwork while the truly diligent are shown the door in layoffs, or tagged as whistleblowing trouble-makers when their actual diligence uncovers fraud.


The banks, in a mass overwhelm, labeled their securities toxic but the truth is that people will pay debts as long as they are not deprived of basic decency in the form of a place to stay and a job.


Make full employment your target and adopt an idea from Islamic banking: forbid the banks from selling debt. The system will restart.


[I hope I have figured out breaking tags. Thank you, Gary and Judge Posner, for allowing me to post here.]

Bank of America and Mr. Higgins missing $millions, It can happen to you, my fellow Americans

More info: http://mrhigginsbank.blogspot.com/

Sure, good!

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Cavs' Wallace needs 14 stitches
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Cavs' Wallace needs 14 stitches
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The team said Wallace sustained lacerationsfrom glass while playing catch with a football in Richmond, Va.

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I think it's less important that Americans don't save than that they don't actually work. http://www.itunit.net The negative savings rate was caused by the savage absence of medical insurance in some measure, and by the savage absence of mass transit in more.

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Daniel, I suspect that the real problem is not the free market versus regulation. More likely it is human nature run amok. If we had decent, self- regulated folks with a conscience running the government and our oligopolies, there might be fewer indictments and bailouts.

Ancient China printing was invented hundreds years ago.

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China printing,regards!!

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Daniel, I suspect that the real problem is not the free market versus regulation.

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