Is The Old Mechanic’s, Old Hammer Functioning Now?

All of my previous post dealt with evaluating the great depression. This post will dig up the past to look for any valuable tool to use for the great recession, because of its similarity with 1930s depression. 2007 recession in U.S is anticipated to be the replica of Great Depression.The recession kicked-off in the same manner as the great depression, with subprime-mortgage crisis as key event this time and various other factors as its fuel. Similarities in both, forecast a possible return of the1930s nightmare. But fundamental analysis clears the air of worry. It shows that the current recession may be devasting enough, but it is nowhere closer to the 1930s financial catastrophe. The below table describes how 1930s was far more disastrous than the 2000s.

                                             GREAT                    GREAT
                                       DEPRESSION          RECESSION

Period	1929-1940	2007-2012 (expected to go till 2016)
Bank Failures	9096 (50% of banks) (Jan 1930-March 1933)	57 (0.6% of banks) (Dec 2007- May 2009)
Unemployment Rate	25%	8.4%
Economic Decline	-26.5% (1929-1933)	-3.0% (4th quarter of 2011)
Biggest decline in Dow Jones industrial average	-89.2% (Sept. 3, 1929- July8, 1932)	-53.8% (Oct 9, 2007- March 9, 2009)
Change in prices	-25% (1929-1933)	+0.5% (Dec.2007- March 2009)
Decline in international trade	50%	30%
Emergency spending programs	1.5% of GDP for 1 year (Increase in 1934 budget deficit)	2.5% of GDP for 2 years (2009 American Reinvestment and Recovery Act)
State’s Response	Raises taxes, cut spending	Federal stimulus plan gives fiscal relief to states to lessen impact of tax increases)
Increase in money supply by federal reserve	17% (1933)	125% (Sept. 2008- May 2009)
Use of fiscal policy	Minimum	Maximum

(Source: US Department of commerce, BEA; FDIC, Federal Reserve; Commerce Department; Dow Jones; Christina Romer, Obama economic adviser, “Lessons from the Great Depression for Economic Recovery in 2009” (March 9) and JEC testimony;Jonathon Eaton, 2010; http://money.cnn.com/news/storysupplement/economy/recession_depression/)

This gives consolation to lot of Americans, as well as hope that sooner or later we will get rid of the problem. Now the question is; can we speed up the recovery by mastering the past lessons learnt?

Past lessons taught us that tight monetary policy by FED and poor fiscal policy by Hoover prolonged the recovery of great depression, and the rescue was possible only when monetary base was expanded. So logically; increasing money supply, decreasing taxes and increasing government spending would suffice the recovery. Than why are the policies contradicting their usefulness now? The government have been pumping sufficient money and engaging in free market, with no satisfactory result. The fiscal policy is also a failure. Fiscal policy was tried because of the criticism it bore in 1930s, which stated “Fiscal policy failed to generate recovery not because it does not work, but because it was not tried.” (E. Cary Brown). Another lesson of decreasing interest rates and reserve requirements of banks, is also trialed. Instead of supporting recovery they have entangled it more. It led to easy lending and investment with borrowed money.

Only one untouched strong combating weapon remains in the bag of past; the advantage of war . So should America use this weapon? Sorry, but the era has moved forward and now is the age of Nuclear war, which sadly cannot give any employment or alleviate production. Hence the past lessons are not applicable to wipe out the financial crisis faced by this generation.  Like the mechanic cannot work with an old hammer, the policy-makers cannot rely on old strategy.