The Second Leg Down in the Great Recession

It looks like the "experts" and political "leaders" are leading the world's economy over a cliff for the second time since 2008. Here is a post by Paul Krugman looking at the lastest research by one of the bright lights of the Federal Reserve's in-house economists:

1937 in 2011?

Gauti Eggertsson has a nice piece on the New York Fed blog about the great monetary/fiscal mistake of 1937, which sent the Great Depression into a second downward leg. As he notes, the underlying situation bore a significant resemblance to current events: unemployment still high (actually under 10 percent if measured by modern standards, so quite similar to now), but with rising prices thanks to commodity shocks.

Where I part with Gauti here is his assertion that modern economists won’t make the same mistake. The research staff at the NY Fed won’t; but the ECB very probably will, and the Board of Governors is under a lot of political pressure to raise rates.

We’ve learned a lot less these past 74 years than you might have imagined — or rather, we learned some stuff, but have spent the last few decades unlearning it.

I side with Krugman. I think that even though smart guys like Eggertsson can see the problem, their bosses won't let them do what's necessary. So we will go into a mini-recession inside the Great Recession, just like in 1937. It is sad, but the "leaders" of today are worse than FDR's brain trust while the Federal Reserve is marginally smarter than the 1937 Federal Reserve, Bernanke is too timid to do the right thing.