All through the many years of the 1929-1939 Great Depression, Wall Street publicists and President Herbert Hoover would repeatedly announce: “Recovery is just around the corner.” Yale university’s great economist Irving Fisher preached the same message. They were wrong. And history repeats itself.

Today, Federal Reserve Gov. Ben Bernanke admits that nobody, including himself, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis.

Why this new vacuum of non-transparency? As one of the pioneer economists who helped create today’s utterly new-fangled securities, I must plead guilty that these new mechanisms both (1) mask transparency, and (2) tempt to rash over-leveraging.

Why should my non-economist readers care about the above technicalities? The best reason is that we must worry whether the policy tools that served so well for Alan Greenspan’s Federal Reserve and for the Bank of England will now have to be changed.

It used to be enough for the central bank to “lean against the wind.” That means, lower its interest rates when unemployment is too high and deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation that threatens to exceed 2 percent per year.

This month, central bankers and Treasury cabinet officers cannot know whether current interest rates are high or whether they are low.

Surprising but true. Safest bond interest rates are indeed low. But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even mammoth General Electric would find it expensive now to finance a loan needed to build a new and efficient factory.
The situation is not hopeless. New, rational regulations that discourage predatory lending and rash borrowing could have helped a lot.

Stabalising
Also, as we learned during the Great Depression, the government’s treasury and its central bank must be both the lenders of last resort and the spenders of last resort. Speculative markets will not stabilize themselves.
The art of best policy is actually the middle way. Not too much freedom for market forces. And definitely not too little freedom.

Global markets have moved into a new epoch. China, India and even Russia and Ireland are currently growing at almost twice the pace of the United States and the core countries of the European Union. Gone are the days when a U.S. president can command the ocean tide to come in and command it to go out.

The U.S. population is five percent of the global total. And still it enjoys per person about 20 percent of total global output. That’s the picture now. Will this last?

When I come to write a newspaper piece like this 10 years from now, I believe America may still lead the pack in average real per capita affluence. But in all probability, the China that has already displaced Japan as the economy with the second biggest total gross domestic product will likely, by 2017, have a total GDP equal to America’s.

When that happens, a typical Chinese family will still be a lot poorer than a family in the United States or even Ireland! Remember, China’s population is several times that of America or any European country. Don’t even ask me what the U.S. dollar in 2017 will be worth.

President George Bush and Vice President Dick Cheney will be long since retired on their respective Texas and Montana ranches, but their rash 2000-2007 tax-cut-and-spend policies will by then have harvested the follies that they foolishly sowed.

Since we live ever in the short run, global leaders must make their best guesses about what to be doing in 2008. Here are my tentative suggestions.

Watch the developments alertly. If America’s Christmas retail sales fail badly — as they could do when high energy prices and high mortgage costs pinch consumers’ pocket books — then be prepared to accelerate credit infusions by central banks on the three main continents.

Price instability
Keep in mind threats of excessive inflation. But be aware that the skies will not fall if the price-level indices blip up from 1.9 to 2.6 percent per annum. What worsens the public’s expectations about price instability is excessive spike-ups in the cost of living chronically maintained.

Finally, to reduce the burden of mass foreclosures of over-expensive mortgages, pioneer as we did with the Depression-era Reconstruction Finance Corp. to explore new quasi-public agencies that specialiSe in supplementing for-profit ordinary lenders.

This suggests expanding in a controlled way the lending powers of quasi-public agencies such as Fannie May and Freddie Mac. Better that they should lose a bit when they help homeowners of modest means fend off foreclosures on their onerous mortgages. Maybe such novel innovations will turn out not to be needed. But keeping in mind worst-case freezing up of bank and other lending agencies, advance exploratory planning will be worthwhile insurance.

What the world does not need now is tolerance for any persistent weakness in global Main Street growth. It is better when physicians worry unduly about a patient’s health than when they worry too little. Good advice also for governmental leaders.

© 2007 Paul Samuelson Distributed By Tribune Media Services, Inc.