Governments around the world are doing what they can to keep their ailing economies working by cutting interest rates and boosting their own spending. No country seems exempt, with even India yesterday cutting rates for the fourth time in as many months and Premier Manmohan Singh announcing that growth this year would approach seven percent, which while enviable in the West, represents a marked decline for India. The biggest fiscal stimulus so far has been promised by incoming US President Barack Obama who is committing his administration to spending $1 trillion to improve US infrastructure.
This comes on top of Bush’s $800 billion financial bailout package and the billions being given to US automakers on the unlikely condition that they put their own financial houses in order.
Washington is thus making a mighty investment of taxes citizens have yet to pay, to save the country from recession. But economists say this pumping of money into the economy is the lesson learned from the 1929 Wall Street crash. Then the US Federal Reserve reversed the liquidity injection policy of the Federal Reserve Bank of New York and started to let banks go bust. Between November and December of 1930 no less than 601 US banks failed. The American economy seized up.
For two years President Herbert Hoover urged banks to lend, businesses to invest and not cut wages, to no avail. Confidence stayed rock bottom. The election of the Democrat Franklin D. Roosevelt with his New Deal promises brought the cautious confidence of a new beginning and a plethora of new federal agencies with big investment plans. The parallel with Obama seems strong, not simply because of their mutual eloquence. From his ethnicity to his undoubted intelligence, the new president could not be more different than Bush. And that difference only underlines the changes that Obama promises, which it is hoped will bring to a halt the rout of US business and consumer confidence.
Though Roosevelt made Americans feel better, the recession did not truly end until the US industry was called to meet the demands of rearmament and supporting US allies, Britain and the Soviet Union in World War II. Further, via his Federal Housing Administration, Roosevelt began America’s transformation into a wide property-owning democracy. The now stricken and nationalized Fannie Mae was created in 1938 to offer cheap home loans.
Seventy years on, it was consumer credit funded by a property price bubble that has brought the US back to much the same disaster as in 1929. The oddity now is in Washington and London in particular, politicians are urging consumers to start spending again while with interest rates almost zero, there is no incentive to save. There are those, including German Finance Minister Peer Steinbrueck, who think this new bubble in personal as well as government debt is madness. They argue that new credit does not eradicate, but merely postpones the settlement date for the real bills that government-sponsored consumer stupidity, banking greed and regulatory incompetence have run up.
