Are We Headed For Another Great Depression?

Nobel Prize-winning economist Paul Krugman sees a parallel between today's economic woes and the Great Depression era.

"In 2008, as in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters' minds, both discredited the G.O.P.'s free-market ideology and undermined its claims of competence," Krugman writes in today's New York Times.

It's not the first time Krugman has sounded the alarm. Back in January, long before anyone knew who would win the Democratic or Republican party nominations, Krugman warned about the shaky financial system. "The fact is that as America's financial system has grown ever more complex, it has also outgrown the framework of banking regulations that used to protect us -- yet instead of an attempt to update that framework, all we got were paeans to the wonders of free markets," he wrote back then.

The economic situation has worsened dramatically since January. The five Wall Street investment bank icons collapsed, Fannie Mae and Freddie Mac had to be rescued, the insurance giant AIG got a $150 billion bailout, Congress approved a $700 billion rescue plan to buy up troubled assets, and General Motors, Ford and Chrysler are now teetering on the brink of bankruptcy.

How bad is it? This week the consumer price index posted its largest monthly decline in 61 years, raising fears of deflation. And in the same week, GM stock fell to $1.70, the lowest level since 1938. (Just last year, GM was selling for $42 a share.)

But as bad as the economy appears to be now, it is not as bad as the Great Depression, when unemployment reached 25 percent and stock prices plunged 89 percent.

In today's economic crisis, the Dow Jones Industrial Average has fallen 43 percent in the past year and the unemployment rate has risen to 6.5 percent, still high but not as severe as the Great Depression. Yet.

Things could still get a lot worse. Since Obama's election, Paul Krugman has written much more directly about the need for dramatic measures to stem the economic crisis. "The bottom line," he wrote shortly after the election, "is that Barack Obama shouldn't listen to the people trying to scare him into being a do-nothing president." Krugman argued for a "serious progressive agenda" that he called a "new New Deal." It's not just "economically possible," he wrote, "it's exactly what the economy needs."

Contrary to the conservative viewpoint that the New Deal overreached, Krugman argues that Franklin Roosevelt's economic policies during the Great Depression were actually "too cautious" because FDR was eager to return to conservative budget principles. President Obama, he says, should not make that same mistake.

So will we see a repeat of the large-scale economic crisis that Herbert Hoover and FDR presided over? "I don't expect another Great Depression," Krugman predicts. But he's not sure about that. He says we've already entered a period of "depression economics."

Krugman flatly compares today's situation to the 1930s, when "the usual tools" of economic policy "have lost all traction." During times of depression economics, he explains, government can't be worried about the deficit anymore. "The usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly," he warns. Instead of fiscal restraint, the economist calls for a major $600 billion stimulus package.

The specific prescriptions may differ, but a similar warning of dire consequences seems to be the message coming from Jim Cramer, host of CNBC's popular investor TV show, "Mad Money." Last night on his show, Cramer called for an aggressive 8 point plan that must be implemented immediately, he says. "January is too late. Another depression will not be avoided if we don't," he says.

As a Wall Street trader, Kramer's background differs from Krugman's, but both are advocating a huge stimulus package to get the economy moving again. While Krugman calls for a $600 million plan, Cramer argues for an even bigger "trillion-dollar infrastructure program to rebuild America from the ground up." Either way, both men are encouraging swift and decisive action.

In fact, Krugman's last words today are chilling. He ends his column in the The Times by warning that "nothing is happening" in Washington that is "remotely commensurate" with the scale of the economic crisis. "And," he writes, "it's scary to think how much more can go wrong before Inauguration Day."