[Congressional Record (Bound Edition), Volume 155 (2009), Part 10]
[Extensions of Remarks]
[Page 12913]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   ``HOW TO AVOID A BAD DOUBLE DIP''

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                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                         Tuesday, May 19, 2009

  Mr. FRANK of Massachusetts. Madam Speaker, Alan Blinder is a man of 
great intelligence, excellent judgment, and considerable experience in 
both making and analyzing national economic policy. In this article 
from last Sunday's New York Times, he draws on all of these qualities 
to give us some excellent advice. I can think of no more relevant 
subject for my colleagues to contemplate as we deal with important 
economic choices.

                [From the New York Times, May 17, 2009]

                    It's No Time to Stop This Train

                          (By Alan S. Blinder)

       Contrary to what you may have heard from some doomsayers, 
     2009 is not 1930 redux. What we must guard against, instead, 
     is 2010 or 2011 becoming another 1936.
       Realistically, there is little danger that the economy is 
     heading toward a repeat performance of the Great Depression--
     when real gross domestic product in the United States 
     declined 27 percent and unemployment soared to 25 percent. 
     What we have is bad enough: our worst recession since the 
     1930s. But unless our leaders behave unbelievably foolishly, 
     we will not repeat the tragic slide into the abyss of 1930 to 
     1933--for two main reasons.
       First, our economy has many built-in safeguards that did 
     not exist back then--like unemployment insurance, Social 
     Security and federal deposit insurance, to name just three. 
     These programs serve as safety nets that cushion the fall. 
     And while they are certainly not strong enough to prevent 
     recessions, they should be enough to prevent another 
     depression.
       The more important reason is that Barack Obama, Timothy F. 
     Geithner and Ben S. Bernanke are not Herbert Hoover, Andrew 
     Mellon and Eugene Meyer. (Who's that? Mr. Meyer was the 
     Federal Reserve chairman from September 1930 to May 1933.) In 
     stark contrast to the laissez-faire crowd that ruled the 
     roost in 1930 and 1931, our current economic leaders are not 
     waiting for the sagging economy to right itself. Rather, they 
     have taken numerous extraordinary steps already--and stand 
     ready to do more if necessary.
       That's the good news. But even if another depression is 
     next to impossible, there is still the danger that next year, 
     or the year after, might turn into 1936. Let me explain.
       From its bottom in 1933 to 1936, the G.D.P. climbed 
     spectacularly (albeit from a very low base), averaging gains 
     of almost 11 percent a year. But then, both the Fed and the 
     administration of Franklin D. Roosevelt reversed course.
       In the summer of 1936, the Fed looked at the large volume 
     of excess reserves piled up in the banking system, concluded 
     that this mountain of liquidity could be fodder for future 
     inflation, and began to withdraw it. This tightening of 
     monetary policy continued into 1937, in a weak economy that 
     was ill-prepared for it.
       About the same time, President Roosevelt looked at what 
     seemed to be enormous federal budget deficits, concluded that 
     it was time to put the nation's fiscal house in order and 
     started raising taxes and reducing spending. This tightening 
     of fiscal policy transformed the federal budget from a 
     deficit of 3.8 percent of G.D.P. in 1936 to a surplus of 0.2 
     percent of G.D.P. in 1937--a swing of four percentage points 
     in a single year. (Today, a swing that large would be almost 
     $600 billion.)
       Thus, both monetary and fiscal policies did an abrupt 
     about-face in 1936 and 1937, and the consequences were as 
     predictable as they were tragic. The United States economy, 
     which had been rapidly climbing out of the cellar from 1933 
     to 1936, was kicked rudely down the stairs again, and America 
     experienced the so-called recession within the depression. 
     Real G.D.P. contracted 3.4 percent from 1937 to 1938; the 
     total G.D.P. decline during the recession, which lasted from 
     mid-1937 to mid-1938, was even larger.
       The moral of the story should be clear: Prematurely 
     changing fiscal and monetary policies--from stepping hard on 
     the accelerator to slamming on the brake--can be hazardous to 
     the economy's health.
       Wow, we've learned a lot since the '30s, right? Well, maybe 
     not. For the echoes of 1936 are being heard right now, even 
     before the current recession hits bottom.
       If you've been paying attention, you know that a number of 
     critics of the Fed are sounding alarms over the huge 
     stockpile of excess reserves it has created--more than $775 
     billion at last count. What these critics are fretting about 
     now is exactly what goaded the Fed into action in 1936: that 
     the vast pool of loose money will ultimately be inflationary. 
     The clear inference is that some of it should be withdrawn 
     before it's too late.
       On the fiscal side, many of President Obama's critics are 
     complaining vociferously about the huge federal budget 
     deficits. Try to ignore, if you can, the sheer hypocrisy of 
     many Congressional Republicans who, having never uttered a 
     peep about the huge deficits under George W. Bush, are 
     suddenly models of budget probity. But whatever the motives, 
     the worries of today's deficit hawks sound eerily reminiscent 
     of Roosevelt in 1936 and 1937.
       Fortunately, Mr. Bernanke is a keen student of the Great 
     Depression who will not allow the Fed to repeat the errors of 
     1936-37. But his critics, both inside and outside the Fed, 
     are already branding his policies as dangerously 
     inflationary, and no Fed chairman wants to be called an 
     inflationist.
       Similarly, I hope and believe that President Obama will not 
     transform himself from the spendthrift Roosevelt of 1933 to 
     the deficit-hawk Roosevelt of 1936--at least not until the 
     economy is back on solid ground. That said, a growing flock 
     of budget hawks are already showing their talons. They will 
     have their day--but please, not yet.
       To avoid a replay of the policy disasters of 1936-37, both 
     the Fed and our elected officials must stay the course. Mark 
     Twain once explained that, while history does not repeat 
     itself, it often rhymes. We don't want any rhymes just now.

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