‘No Return to Normal’

‘NO RETURN TO NORMAL’…. In the cover story for the next issue of the Washington Monthly, James Galbraith, a University of Texas economist and senior scholar with the Levy Economics Institute, has a must-read analysis of the economic landscape, just how serious the economic crisis is, and why the Geithner plan may come up far short of what’s needed.

In short, if we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression. And this can only be done by qualitative and historical analysis. Our modern numerical models just don’t capture the key feature of that crisis — which is, precisely, the collapse of the financial system.

If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work?

It is a chilling piece, challenging long-held assumptions — embraced even by members of the Obama administration — about self-stabilizing economic models. If this downturn is unlike most modern recessions, and Galbraith believes that it is, then the “return to normal” is off in the distance, and these initial steps taken by the White House are woefully inadequate.

As Paul Glatris, the Monthly‘s editor in chief, put it, “If Galbraith is right — and I fear he is — it means that tens of millions more Americans will be out of work in a year or two or five, even if the stimulus creates all the jobs the president expects. It means that the big banks really are ‘zombies’ that will neither resume normal lending nor grow their way out of insolvency regardless of how much money the Treasury pours into them. It means that the auto companies will burn through every dime the government lends them and still not turn a profit.”

Galbraith goes on to offer a recipe for a more comprehensive approach to what ails our entire financial system. Take a look.