Before reading this article I recommend that you read article 114 many of my comments will be directed at Benjamin Powell’s article from the Washington Times Sunday, March 8, 2009.

The main reason touted by many economists that the 1930’s depression was so severe was that President Hoover held the belief that the government should let market forces take its course and should not get involved in trying to fix the economy. That same outmoded view seams to be held by Dr. Powell in his statement: To achieve long-term economic recovery, market forces, not political forces, need to direct capital and labor to their most productive uses.
President Hoover allowed the economy to hit rock bottom before Roosevelt was elected and implemented a massive stimulus to the economy which brought the economy back.

Dr. Powell relates that in the early 1990s the Japanese real estate values fell by 80% and the Japanese stock market the nikkei fell by 70%. The Dow at the present time seams to have stopped falling at 50%. The view of our current housing values is varied one half of the most severely depressed housing areas are in only 35 counties nation wide and one fourth of them are in only 8 counties in the entire nation. This can not account for the severe shock delivered by the sudden decrease in consumer purchasing.

But perhaps this can. Because of the very high real estate values in larger cities especially on the east and west coasts. The average American in order to live reasonably close to his employment or commute long distances spends nearly all his income on his house payment and has literally made his house his retirement nest egg. This situation coupled with American credit card debt averaging an astounding $8000 per person. Then add an extremely low savings rate 0%, it is not difficult to determine that the average American has virtually no discretionary spending funds. Now we introduce $4 Gas prices and the same average American goes in debt and can’t meet his mortgage payment and he ceases to make discretionary purchases forcing the economy to go south after only a few months. Note that it was high gas prices that really killed the sale of SUVs not the unavailability money for loans.

Dr. Powell goes on to relate that for the Japanese and American recessions,
In both cases, low interest rates helped fuel a financial bubble and inflate stock and real estate prices. The bubbles eventually burst, pummeling stock and real-estate values.
It is interesting that Dr. Powell has stated above that government should not interfere with the market. Yet this is exactly what the Bush administration did when they lowered interest rates causing the public to flee safe Bank CDs creating the stock market and other risky investment bubbles. The Fed has been adjusting interest rates for decades in order to stabilize the economy but in this case the growth in the stock market seams to have been the objective.

Dr. Powell is right about the Bush administration’s mistake in bailing out the Wall Street investment banks by $700 billion. Especially since nearly all Americans know that the money went to pay high employee bonuses and to buy up smaller more economically stable banks rather than financing their bad investments. Now the problem becomes how to shore up these banks since the function they performed has all but collapsed. The question as to whether to nationalize these banks is meaningless if it costs more than 50% of the banks net worth to shore it up it has already been nationalized.

According to Dr. Powell:
To achieve long-term economic recovery, market forces, not political forces, need to direct capital and labor to their most productive uses.
I disagree with this point of view when there are no market forces government should create them and can direct capital and labor into building infrastructure such as bridges and green industries. Private industry can not and would not do this.

As to whether President Obama is doing the right thing with the new stimulus package it appears that it may not be the best package but may prove to convince the public that it will slow the onrush of the recession. The key is in stopping the panic and getting the people to invest and make purchases.

There is one thing President Obama must do he must keep gas prices below the two dollar level. I see this as the Achilles heel to convincing the public that the severity of the recession has passed. A significant rise in gas prices instantly affects all Americans and the message is that the efforts to slow the recession has failed. High gas prices blew the economy out the window and you can bet that it will do it again. Since we control milk prices I don’t see this as a problem, this is simply a matter of making government investments or capping speculation.
Gas prices below $1.50 would surely be a stimulus to the economy.