What a difference massive capital infusions by governments all over the world can make! For now, the Great Depression, Take 2, appears to have been postponed. Early indications from Europe on Monday morning are that credit markets are continuing the loosening trend that manifested itself last week. Both one-month and three-month interest rates dropped sharply Monday morning. As Wall Street prepares for its own financial markets to open, the mood appears, if not buoyant, at least not panic-stricken to the point of apocalyptic despair.
Which is always a good thing.
But that does not mean all is fine and dandy. No depression does not mean no recession. Last week's economic indicators in the United States were unanimous: The real economy is in bad shape.
Alan Blinder, a professor at Princeton and former Fed vice-chairman, said: "It looks to me like the economy has fallen off a cliff."
He said it was all but certain the U.S. would face a recession worse than in 2001 or 1990-1991.
"The game is now about making sure this recession is less deep and less long than the 1982 recession."
Many experts expect unemployment will soar from its current level of 6.1 per cent and worry it could go above 8 per cent.
The Fed now thinks that unemployment will rise above 7 per cent and is likely to peak at about 7.5 per cent -- a level last seen in 1992.
"We may be talking about one of the most severe recessions in the post-war period," said Larry Meyer, chairman of Macroeconomic Advisers and a former Fed governor.
The game is now about making sure this recession is less deep and less long ... I will interpret that to mean that the time is now ripe for aggressive Keynesian stimulation of the economy. Whoever is elected president in two weeks (two weeks!!) should not wait until Inauguration Day to exercise some leadership. And neither Obama's middle-class tax cut nor McCain's "across-the-board" spending freeze is the right prescription. Now is the time for big investment in infrastructure -- bridges, roads, public transportation -- and substantial improvements in safety nets. If the easing in credit markets visible over the last week proves anything, it's that gigantic government interventions in the economy can make a real and positive impact. Let's not forget this lesson.