Story updated on Monday, October 6
This is not the Crash of 1929 revisited, and we are not heading into a second Great Depression. No developed country this time round is going to face the 25 percent unemployment rate that the United States experienced in the 1930s.
"Capitalists can buy themselves out of any crisis, so long as they make the workers pay," Lenin said, but it's more complicated than that. The capitalists didn't manage to buy themselves out of the Depression, mainly because they didn't know how to use the government (i.e. the taxpayers) to restore credit and confidence. They know now, however, and they can still buy themselves out of this crisis. With a little help from the government, of course.
President George W. Bush's radio talk just after the crisis broke in mid-September was all about getting the workers to pay: "When the government asks you to pay for mistakes on Wall Street, it does not seem fair, and I understand that. And if it were possible to let every irresponsible firm on Wall Street fail without affecting you and your family, I would do it. But that is not possible." So we're going to bail Wall Street out with U.S.$700 billion of your money.
All right, it's not "real money". It is credit that the U.S. government will create by the electronic equivalent of printing money, and it doesn't come out of current taxes. It is debt that will eventually come out of the next generation's taxes, so not to worry. The boomer generation have spent their whole lives loading debt onto the following generation, so why stop now? But perceptions are everything, and for a moment there the tax-payers thought it was real money. They didn't like that.
It was the deluge of e-mails, letters, and calls from outraged voters that caused the bailout legislation to be thrown out the first time it went to the House of Representatives on September 29. Some Republicans argued that they could not support "socialistic" measures like nationalizing banks and capping executive salaries, but what really drove the House's rejection of the bill was the fact that every member faced re-election in five weeks' time.
All 435 Representatives had their jobs on the line in the elections on 4 November, and those in marginal constituencies knew that they would be severely punished at the polls if they used "the taxpayers' money" to bail out Wall Street now.
But the Senate (only a third of whose members face re-election this year) passed the bill easily on October 1, once some crowd-pleasing sweeteners had been added. By the time the members of the House were herded back into the chamber to vote again on Friday, October 3, the fix was in.
A majority of Republicans, still hoping to cling to their seats in an anticipated Democratic landslide, still voted no, but enough Democrats had been persuaded to vote yes (by that same perception of an impending landslide) that the legislation slid through. The workers have been persuaded to save the capitalists ("because it's not about Wall Street; it's about Main Street") once again.
It's not all over yet. There will probably be further bank failures and piecemeal government bailouts in many countries, for the "toxic" financial instruments based on subprime mortgages are widely held by banks and other financial institutions around the world. This does not add up to an economic Armageddon, however, although strenuous efforts are being made in the media to portray it as exactly that.
The stock market can crash (as it did in 1987) without having much effect on the real economy. Bank failures are more serious, but they do not have to entail wider economic disaster either. The business cycle was overdue for a recession anyway, and there is certainly going to be one now, but despite all the apocalyptic talk it hasn't arrived yet.
Even the countries where the housing bubble was biggest and the mortgage lending most reckless, the United States and Great Britain, are not yet technically in a recession. When it does arrive, it will probably be worse than the mild recession of the early 2000s, but maybe not as bad as the recessions of the early 1980s and the early 1990s.
It will almost certainly not be as bad as the economic stagnation and runaway inflation of the 1970s, and it may be less bad in the big developing economies than in the developed ones.
As for a rerun of the Dirty Thirties, that is not on the table even in the United States, where deregulation was most extreme and the creation of impenetrably complex financial "derivatives" of doubtful value was most enthusiastic. So you might as well take what entertainment you can from this spectacle of mass folly among the high and the mighty.
The Masters of the Universe have been revealed as naive speculators who believed that property values could only go up. The journalists who preached the blessings of unregulated free markets have been unveiled as blind ideologues at best, and at worst paid propagandists. The response of American politicians at all levels has been pathetic.
This mass folly will go largely unpunished, of course: these people are not going to lose their homes and end up poor. Most won't even lose their jobs. It takes another old Commie (a pre-Commie, actually) to sum it up. In 1852 Karl Marx wrote: "Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce."
Not the Great Depression, but the Reign of Folly.