Hoover And Obama

Edward Harrison:

First, it is clear that depressionary credit crises lead to political dysfunction and a worsening fiscal picture that results from the conflicting priorities which emanate from that dysfunction. This was true during the Great Depression. We have witnessed it in Japan in the last twenty years and we are certainly witnessing it again in the US and Western Europe.

The middle path that Hoover ploughed and that Obama is ploughing owes to this dysfunction and conflicting priorities. Remember that Roosevelt ran against Hoover in 1932 on a fiscal responsibility platform, much as I anticipate Republicans will against Obama.

Second, no amount of government spending is going to allow this credit system to grow its way out of debt. The problem isn’t ‘fixable’ without significant deleveraging.

I have said it before, but it bears repeating here:

There are four ways to reduce real debt burdens:

1. by paying down debts via accumulated savings.
2. by inflating away the value of money.
3. by reneging in part or full on the promise to repay by defaulting
4. by reneging in part on the promise to repay through debt forgiveness

Right now, everyone is fixated on the first path to reducing (both public and private sector) debt. I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that. More likely, the western world’s collective public sectors will attempt to pull this off. But, at some point debt revulsion will force a public sector deleveraging as well.

He's right.  He goes on to discuss #4 some more.  One thing I want to focus on in the comparison between Obama and Hoover is this:

Remember that Roosevelt ran against Hoover in 1932 on a fiscal responsibility platform, much as I anticipate Republicans will against Obama.

The thing to remember is that Roosevelt got elected, then put the New Deal in place, and waited until 1937 to try the deficit reduction thing.  It caused the 1937-38 recession and left the Great Depression to linger on until WWII drug the country out of it.  Does anyone in their right mind expect the Republicans to make a 180 degree turn after the election in 2012 and propose some programs to benefit average folks?  I only imagine more tax cuts for the wealthy and greater cuts in government spending.  That would gut the middle class while making the downturn even worse.  We'll see what happens, but don't expect anything constructive from Republicans anytime in the next five years.