While President Bush and his fan club over at Fox Business News refuse to admit America is in a recession the economists have moved on from fears of stagflation to absolute terror;
Wall Street fears for next Great Depression
But there's no mistaking the mood within the US Federal Reserve at the moment. Pessimism was replaced by fear months ago. While the economy is moving inexorably towards a slowdown, a high-speed train wreck is taking place on Wall Street.
It is that combination that has scared the living daylights out of the Fed's hierarchy and prompted them into a history-making bail-out of the Wall Street broker Bear Stearns. To put the weekend's action into context, this is the first time since the Great Depression that the US central bank has funded the rescue of a financial institution that wasn't a regulated, deposit-taking bank.
Financial markets turmoil stirs economists' memories of 1929 crash
"The threat of contagion and wholesale breakdown on a scale of 1929 is real," said University of Maryland business professor Peter Morici.
"The real questions are - which of the big banks will be next to fail? How many more banks will fail? Will the whole system turn to panic if Citigroup (another troubled bank) unwinds?"
Harvard economist Martin Feldstein said the U.S. economy could suffer the worst recession since the Second World War.
Many economists now believe the U.S. economy has already slipped into negative territory,
Ben Bernanke has likened the Great Depression to the Holy Grail of macroeconomics – an experiment in unravelling the mysteries of global economic collapse.
As an academic specializing in the Dirty Thirties, the former Princeton University economist ultimately concluded that U.S. banking authorities botched the Depression by letting panicked runs on banks wreck the real economy.
Years from now, a new generation of academics may similarly try to draw lessons from how Mr. Bernanke, now the U.S. Federal Reserve Board chief, handles the great credit collapse of 2007-08.
By running to the rescue of investment banks and opening up the interest rate spigot, Mr. Bernanke is eager to avoid the same problems he dissected in his seminal 1983 paper, “Non-monetary effects of the financial crisis in the propagation of the Great Depression.”
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