. . . if the economists and politicians don't realize where we are heading, we could enter our Second Great Depression.

And if they do realize where we are heading?

What is the prescription? And how do they know?

The Great Depression is unlikely to be a good example from which to draw economic policy lessons. It occurred during a brief and abnormal period between the first and second half of the World War. It was influenced by the reparations burden from the first and the rearmament for the second.

There are great differences in our financial systems. We now have an electronic payments system exchanging about $5 trillion/day (a single New York bank can process over $2 trillion/day). We also have a derivatives market of upwards of $500 trillion in notional value. "Just in time" inventory managment means that there is less inventory buildup to cause business cycles, but that instead any slowdown is rapidily propagated backwards along a lengthy and complex supply tree. With the shift to a 70% service economy, no one knows how hard it is to restart demand, once demand has decreased.

Since the circumstances of the Great Depression are quite dissimilar to the present, it may be just as instructive to relate our current position to that of England in the Long Depression (1873-1896). The popping of the dotcom bubble in 2000 is more like the popping of the railroad bubble in 1873. The application of semiconductors and digital technology to communications and computing appears to be causing rapid changes to our economy just as the application of steel and steam to transportation and shipping did in the late 1800s. As an example, the score-based mortgage lending practices, the complex synthetic debt instruments, the highly varied derivatives contracts, and the network of bilateral private derivative trading would not be possible without the information technology that now exists. Regulators were not prepared to cope with the rapid changes in financial systems enabled by technological change.

Economically and militarily, the United State's position appears to parallel that of Great Britain in the late 1800s, although politically and socially we may resemble the Austro-Hungarian Empire more.

This is an excellent post!
I liked this part especially:

In the late 1920's before the crash, the average American household was not a consumption machine and the U.S. economy was a production and export powerhouse. There were no credit cards or home equity lines of credit. So while stupid tariff bills like Smoot Hawley hurt the global trade system, the recovery was not totally dependent on reviving domestic consumer demand. By contrast the current U.S. economy is totally dependent on the average citizen spending every penny she earns at the mall.

I think the people Obama has chosen to solve the problem are in fact part of the problem itself (they helped create it with Clinton) and they are simply trying to save their "legacy".

Obama himself is very intelligent and focused, but he simply has not been in public life long enough to have personal experience and knowledge of the people he is having use as his toolbox.

Sometimes shouting "FIRE" in a crowded theatre is a moral obligation.

Maybe, just maybe, if the televised media had attempted to tackle difficult subjects, unpopular subjects and said something other than "Buy, buy, buy!!" "Take out that loan NOW" and "There's never been a better time to hold onto your investments" then it's possible we would be in a different situation. Sure, it's a Monday-morning quarterback comment, but this echoes a series of conversations between a group of friends about the different media messages being portrayed back in January 2008.

The Economist had issue after issue proclaiming the coming "credit crunch". They are certainly not the only ones to be ahead of the game on that one, nor were all their authors' predictions accurate. The point remains that the information was out there for the taking for anyone willing to look for it. The call for "PANIC" would not have changed the reality of the off-books dealings of the banks, but it would likely have brought them to light sooner. I am in agreement with those who speculate that we have just scratched the tip of the iceberg of undisclosed losses the major banks really have.

At the bottom of our current economic woes, as has been pointed out, was the easy money to be made in the derivatives markets, coupled with the loose standards for taking out a mortgage. The "Commodities Futures Modernization Act of 2000" was pushed through congress by Phil Graham and Dick Lugar without so much as a whimper from the televised media.

If there is a lesson to be learned from this economic crisis, it's DON'T BELIEVE WHAT THE SHITBOXES ON TV ARE TELLING US. They are NOT in the business of exposing the reality of the world in which we live.

This is true for the majority of what passes as news.

Of course, TPM is doing the greatest service possible. That's presumably why we're all here. Please keep up the fine work.

For the time being, it doesn't make much sense to describe US households as savers. That would imply a surplus that's going into the bank or other investments. Instead, they're simply doing their best to consume and borrow less, because they have less income to do either of those things with. Existing debt service is already more than enough, as are other mostly-fixed costs. Calling them savers is like calling a wolf that can't hunt any more a herbivore.

Now it may be that attitudes have been permanently readjusted so that when there are surpluses to be had they will go into investment rather than consumption, but I'll believe that when I see it.

Paradoxically for those who have a surplus, neither consumption nor investment are really good ideas at the moment -- why buy something now when deflation will make it cheaper next year, but on the other hand, why invest in anything but cash when the market hasn't finished tanking...