The term “Lesser Depression” looks more appropriate by the hour. Harvard’s Kenneth Rogoff suggests another label, the Second Great Contraction (to distinguish it from the Great Depression). I’ve quoted him in Food for Thought. See his excellent essay on the op-ed of the Financial Times* on Aug. 9, 2011
The Panic of ’08, it turns out, looks to have been only the beginning. We are witness to Second Round of the Global Economic Crisis — GEC2. We’ve never really recovered from the financial crash caused by the “global savings glut” (to quote our current Fed chair), the refusal of former Fed chair Greenspan to prick a bubble until it had blown to gigantic proportions, and the irresponsibility of hot-shot bankers in New York and London who played “heads I win, tails you lose,” also known as privatizing gain and socializing loss. And let’s not forget the rating agencies that threw holy water in the form of the highest AAA ratings on Wall Street deals that quickly turned into toxic waste.
As cited by Gavyn Davies in the Financial Times Aug. 6, two unforced errors have to be rated the proximate causes of the commencement of Round Two. The first is the utter failure of the European Union to deal with the financial and banking issues that festered more of less since the Panic of ’08. As Davies observed in the Financial Times, “Germany says all options are on the table, except the one that would work, which is a greater issue of eurobonds.” Ir remains to be seen whether the steps taken over the Aug. 6-7 weekend are enough.
The other unforced error is the debt-ceiling circus in Washington. I have to agree with the FT’s Clive Crook, who wrote on his blog over the weekend, commenting on the historic Standard and Poor’s downgrade of U.S. Treasury obligations, that “No country whose politicians are willing to use the threat of default as a tool for political advantage should command a AAA rating.” Whether or not S&P was wrong, the hostage-takers have inflicted permanent damage. The cost will be born by the innocent as well as the guilty.
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