I'm talking today about a graph I pointed to yesterday. It is a "picture worth a thousand words," truly. File this under "things not to do during a credit crisis, exhibit A:" prey off investors fear and suck up all the credit.
Also file under "fighting the last war." I just read Amity Shlaes' excellent book about the Great Depression, The Forgotten Man. The Depression was brought on by a number of things, but the real disaster at the beginning was deflation, brought on by the stock market crash of 1929 and the closing of foreign markets due to Smoot-Hawley, as well as the all-too-familiar "Fed getting called out after keeping interest rates too low for too long." The New Deal was either a godsend in tough times that went on too long, or else a disaster that prolonged a sharp downturn into a decade-long depression, depending whom you talk to. But, whatever else you say about Roosevelt, he at least forced himself to balance the budget from time to time. Roosevelt did this through a series of arbitrary taxes on rich, corporations, and consumables. The effect may not have been so bad if the structure had stabilized at some point.
What the early Great Depression did not have was a credit crisis - in fact, gold was pouring into the country from Europe in 1929 after the crash, and if Hoover hadn't stepped in the money supply would have probably inflated and we could have avoided the deflation problem and probably the whole Depression. Unfortunately, the current depression does include a credit crisis. Really, I think the danger of deflation has been grossly overstated - the housing market is still above historical trends, and the stock market is a poor indicator of short-term money supply. The problem is liquidity, brought on by too much credit being locked in unmovable assets. The market solution would be to re-balance these - banks and lenders who have low-risk portfolios would essentially feed off the carcasses of high-risk institutions in a buyer's market. To balance portfolios, they would use a similar amount of cash to buy up low-risk debt in the form of corporate and municipal bonds in order to balance their portfolios. This would fund capital and infrastructure improvements, making construction jobs available, decrease layoffs, etc.
The problem is illustrated by Planet Money's chart. The federal government has flooded the low-risk debt market. That money is no longer available for corporations and local governments to buy at low interest rates. In the middle of a credit crisis, the federal government is sucking up all the credit! They're fighting the current depression with Great Depression tools, completely ignoring this fatal flaw.