The Krugman Recipe for Depression - by Amity Shlaes

Paul Krugman won the Nobel Prize for Economics this year. He advocates the use of massive government spending, similar to the 1930s New Deal policies implemented by Franklin Roosevelt, to address our current economic problems.

Amity Shales is the author of "The Forgotten Man: A New History of the Great Depression," published last year. She makes the case that Roosevelt's policies were very counter-productive and made the depression worse than it otherwise would have been.

This article is a good overview of an issue that will be extremely important in the coming months and years.

Mad Max and the Meltdown

Daniel Henninger, assistant editor of the editorial page of the Wall Street Journal, argues that there's a connection between the secularization of Christmas (taking Christ out of Christmas) and the financial meltdown we are experiencing.

How to Help People Whose Home Values Are Underwater

This is an interesting idea put forth by Martin Feldstein. He was chairman of Reagan's Council of Economic Advisors for several years. The goal of his plan is to get the credit markets working again by stabilizing the housing market. It would also enable many borrowers to avoid foreclosure. If it worked as he hopes it would (big if), it would cost the government a lot less than other plans that may be tried.

Five Myths About the Great Depression

A Perfect Storm - election commentary from Thomas Sowell

College Grad Missteps

"A Demon of Our Own Design"

Audio of an in-depth interview with Richard Bookstaber, author "A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation."

The True Meaning of 'Historic Vote'

"The real "change" being put to a vote for the American people in 2008 is not simply a break from the economic policies of "the past eight years" but with the American economic philosophy of the past 200 years. This election is about a long-term change in America's idea of itself.... With this election, the U.S. is at a philosophical tipping point."

WSJ OCTOBER 29, 2008

Absent From This Downturn: Worker-Investor Dichotomy

By MARK GONGLOFF

It is one of the oddities of the markets that when unemployment is at its worst, investors do well. This time, investors and workers may suffer together.

Markets usually start rising before the economy begins recovering from a slowdown. But cautious companies typically wait until the recovery is well on its way before hiring again.

This downturn isn't typical. During a normal economic slowdown, rising unemployment causes more people to default on their credit cards and mortgages.

This time the defaults came before the job losses, and are likely to get worse as layoffs mount. That completes a loop in which tight credit hurts the economy, including employment, leading in turn to tighter credit and more pain for the economy, profits and stocks.

"We're deep into a self-reinforcing negative cycle," said Mark Zandi, chief economist at Moody's Economy.com, "and it threatens to come completely unraveled because of a rapidly eroding job market."

Many economists expect the U.S. jobless rate to jump from 6.1% in September to at least 8%, the highest since the 1981-82 recession. One reason stocks around the world have plunged is uncertainty about how far this knife will cut.

Tuesday's report of record-low consumer confidence suggests the wound will be deep. The report showed the highest percentage of consumers saying jobs are "hard to get" since 1993.

History says this should be good news for investors. Since 1950, the Standard & Poor's 500-stock index has gained 15%, on average, a year when the unemployment rate has been higher than 6%, according to Ned Davis Research. That compares with gains of 5.2% a year when unemployment was between 4.3% and 6% and just 2.1% a year when unemployment was 4.3% and below. Unemployment is a lagging indicator, and tighter labor markets eventually fuel bigger profits.

The current crisis is making a mess of history. Goldman Sachs Group Inc. analyst Richard Ramsden recently raised his estimate for total banking-sector credit losses by 21% to $1.4 trillion to account for the deteriorating outlook for growth and employment. With $600 billion in losses in the books so far, that would mean banks are less than halfway there. Other forecasters have higher numbers.

That would suggest the financial sector is highly unlikely to bounce back strongly by early next year, as the Wall Street consensus now expects. The sector's losses could keep undercutting S&P 500 profits, which already have fallen for a record-tying five consecutive quarters.

Moody's chief economist John Lonski expects U.S. gross domestic product to expand between 2% and 2.5%, on average, a year for the next five to 10 years -- well below its historic trend of about 3%. Such weak growth translates into anemic stock returns.

Any industry that depends on discretionary consumer spending, from electronics retailers to specialty apparel stores, will be at risk as long as unemployment is rising. Higher automobile-loan default rates and slumping sales will keep hurting the auto industry. Slack demand already has crushed energy and other commodity prices and threatens to keep a lid on profits in the energy and materials sectors.

As for the bond market, a slower economy will lead to more corporate defaults, giving banks another reason to tighten lending standards. Lower tax revenue will continue to hurt state and local governments, a drag on the municipal-bond market.

"Take almost any market right now and ask yourself: Is it better off with a rise in unemployment?" said Bianco Research strategist Howard Simons. "We are in nothing but adverse feedback loops now."

Another historical episode sounds a cautionary note: Between September 1968 and November 1982, the unemployment rate seesawed higher, from 3.4% to 10.8%, in a series of recessions. The S&P 500 was priced at about 103 at around the beginning of that period and at 103 near the end. Though there were ups and downs, over a long-haul recessionary period, stocks were flat.