One from a major IB economist, one from a major politician and now one from a major global organisation.
Feb. 7 (Bloomberg) — Advanced economies are already in a “depression” and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.
“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”
Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.
There are probably a host of others now (see for instance, this Australian economist) that could be added to the list – but it is an expanding one.
If we are in a Depression, or on the verge of one, there’s a very small silver lining; observing this crisis, with the benefit of some 75 years of economic theory and history, could help us understand the causes of the Great Depression and economics in general.
Paul Krugman did an interesting post on this idea back in late November, asking:
Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?
A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression – a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.
Specifically, the theory goes, the Great Depression could have been avoided had the Fed moved quickly and aggresively to expand the monetary base.
That arguably, is what the US and others are doing now – via quantitative easing. And now, as Krugman puts it:
So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base.
And guess what – it doesn’t seem to be working.
I think the thesis of the Monetary History has just taken a hit
Related links:
Coming (rather wonkishly) Up To Date On The Great Depression – A Fistful of Euros
Was the Great Depression a monetary phenomenon? – Paul Krugman
‘Biggest shock to world wealth since WW2′ – FT Alphaville