The Speed of an Economic Recovery

[lumpymunk]

We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.

Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.

By 1923 post-war unemployment plunged from 11.7% to 2.4%. Harding paid off war bonds and slashed the national debt by 1/3 (not just the "deficit", which was annihilated entirely)... by 1922 the Dow was already back up above 100 from it's previous low in 1921 of 63.9.

Compare that to the policies throughout the early 21st century of bailouts, 0% Fed interest rates, and aggressive "quantitative easing" (creating money out of thin air) and you get an economy that is paralyzed. Everyone is asking... where is the recovery?

There is a strong correlation between federal reserve pumping, government intervention, and the slowness of a recovery. The Great Recession continues to suffer the slowest recovery of any recession since the 1950s, because stimulus only intensifies the long-term problem of delaying the correction and allowing misallocated resources to remain unliquidated.

http://mises.org/daily/3788
http://www.usgovernmentspending.com/us_ ... chart.html
http://visual.ly/economic-recovery-afte ... -recession

[stromboli]

+1 Very well stated. Throwing money at a problem never fixed it. The stimulus should have had a whole bunch of conditions with it to rectify what was wrong; better yet, government should have cracked down on the behavior that created the recession and harshly punished the people involved. But unfortunately the same essential behavior is still going on, and the same people driving it.

[AllPurposeAtheist]

The rules have all changed since then. The world is nothing like it was in the 20's and we are not on the gold standard. Most people are no longer farmers, miners or sweatshop workers.

[lumpymunk]

better yet, government should have cracked down on the behavior that created the recession and harshly punished the people involved. But unfortunately the same essential behavior is still going on, and the same people driving it.

I agree with your statement, but I'm sure our idea of who the "people involved" are is very different.

The rules have all changed since then. The world is nothing like it was in the 20's and we are not on the gold standard. Most people are no longer farmers, miners or sweatshop workers.

The idea isn't to return to those times either, the idea applied now would be to stop rampant government borrowing to drive mindless consumerism.  Sorry but you don't need a $500 iPhone 5 if you've already got an iPhone 4.  People spend so much useless money on imaginary things like "fashion" and "trends" it's fucking sickening.  Tightening the belt on that kind of shit would be a tangible measure of "denial and sacrifice" ... "for a nationwide drive against extravagance and luxury."

[josephpalazzo]

Tightening the belt on that kind of shit would be a tangible measure of "denial and sacrifice" ... "for a nationwide drive against extravagance and luxury."

Now that may sound ok, but there are unintended consequences:

(1) If people cut down on their spending, the law of demand/supply tells you that firms will lay off people - less demand, less supply (less work). Your unemployment rate will rise. What's in store for these unemployed people is a future life in crimes.

(2) If the pool of unemployment is large, then firms, after the lay off, will have every incentives to lower wages since you can be easily replaced by someone without a job who will be quite willing to work at half your salary -- a large supply (of workers) will depress the price (which in this case are the wages).

You see, the law of demand/supply is not a right-wing nor a left-wing idea. It's a law unto itself, similar to the law of gravity. And if you don't understand it, then your economic theory will be just be another ideology that will be totally disconnected from reality.

[LikelyToBreak]

Traditionally, the decent paying jobs for the lower middle class were in manufacturing.  That is no longer the case because the manufacturing jobs have gone overseas.  We could look at what we are doing to cause manufacturing jobs to go overseas, or we could just make sure the banking service sector gets everything they want.  Having chosen the second option, that leaves service jobs for the lower middle class.  

So, as Johan pointed out in another post, we have plenty of jobs for truckers to truck products made overseas to truck around.

The government could encourage manufacturing in many little ways.  While not getting rid of necessary environmental and safety regulations, they could get rid of many of the conflicting and unnecessary regulations which the bureaucrats of the different regulatory agencies have made up just to get a "bullet" on their evaluations.  The regulatory agencies could work with our industries to help ensure compliance, instead of taking the adversarial role they are taking now.  We could look at tort reform, to stop the lawyers from putting thousands out of work with what are often bullshit lawsuits.  We could go to the metric system like the rest of the world.  We could encourage the union members to take back their unions from the organized crime syndicates which run them now.  We could increase tariffs and fight overseas to have tariffs and other hindrances to us selling overseas lifted.

But, those things don't fit on bumper stickers very well, so they won't get done.  That and the owners of the Fed, don't give a flying rat's ass about anybody but themselves.  Having just been established in 1913, they didn't own us enough in 1920 to stop economic recovery.  They now own us, so they see no need for an economic recovery of the lower classes, because they got theirs and that is all that matters to them.

[entropy]

There is no one economic panacea for all economic times. Keep rolling the calender forward from those early 1920's times - by 1929 the economy was roaring along. But that great economic performance was based on people taking on too much private leverage (debt). It was a house of cards and in October of 1929 the cards came crashing down. Then Hoover did exactly what the OP (original post to this thread) says should be done. Austerity. How'd that work out?

Looking at the 2000's, I think the better parallel is what happened toward the end of the 1920's and the beginning of the 1930's rather than looking at the early 1920's. By 2008, there was too much private leverage again and much like 1929, the house of cards came crashing down. If we had done in 2009 what Hoover had done in 1930 (lots of austerity) we would have had another great depression. That conclusion is strongly implied by the evidence of what happened to the economies that went the Hoover austerity route and what happened to economies like the U.S. that did some government stimulus (though the evidence indicates it wasn't sufficient stimulus).

Additionally, one of the claims made by the quantitative easing critics is that inflation will take off. They have been saying that for years now and there is no sign of inflation taking off yet. Do a search of Paul Krugman's blog (//http://krugman.blogs.nytimes.com/) for "liquidity trap".

It's not surprising that the recovery from the great recession has been much slower than other recoveries since the 1950's because the 2008 recession was WAY worse than those other recessions. I'd also point out that in almost every one of the recessions since 1950 there was government stimulus spending to boost the recovery. Reagan did it. Both Bush's did it. They did stimulus spending because it helps speed up the recovery from a recession. The deeper the recession, the more stimulus that is needed.

[lumpymunk]

Traditionally, the decent paying jobs for the lower middle class were in manufacturing. That is no longer the case because the manufacturing jobs have gone overseas. We could look at what we are doing to cause manufacturing jobs to go overseas

...and south of the border.  Liberals don't like the answer to this question... but those that believe in the free market have no problem with it because the answer is obvious.  It's a dirty little secret for liberals I guess.

"I'm from the government, and I'm here to help!"

- Those "necessary environmental and safety regulations" are a part of it.  Most recent release from the IPCC has a hard time explaining why their models predicted catastrophe and the temperatures over the last 15 years have barely increased despite their 95% certainty that we are responsible for global warming.  We've had one of the mildest hurricane seasons since the 1970s this year.  

http://www.dailymail.co.uk/sciencetech/ ... years.html

Logically you would expect a huge industrial boom to carry with it some change in the temperature if we were responsible, because China doesn't have these regulations to deal with and they are not being friendly with the environment right now, lol.  Additionally, workplace injuries were on the decline prior to OSHA, and OSHA has not increased the rate of decline.  The fact is people who work want to stay alive to enjoy the fruits of their labor, and the market has handled this just fine.

- The minimum wage is of course a part of it along with unemployment insurance.  Propping up wages artificially prevents prices from falling as deflation soaks the excess fake money out of the economy.  It serves as it's own barrier for real-wage increases... which is why the standard of living for those earning the minimum wage never seems to increase... and it will never increase... and it should not increase.  I'm fine with increasing the minimum wage, because it flat won't matter.

- The "hiring tax" is another big one.  This refers government taxation on income for both employer and employee, skimming the top for FICA and MICA, dealing with regulations pertaining to legal exposure from anti-discrimination and disabilities lawsuits thanks to the EEOC and ADA.  Both of these laws actually just encourage companies to hire as few minorities or handicap people as possible because each one they hire is a potential lawsuit. In these cases it isn't "innocent until proven guilty" its "You are guilty unless you can prove you've given proper accommodation to this handicap person" or "You are guilty until you can prove you're not a racist."

- Inflationary policies from the Fed that weaken the dollar also result in higher energy costs as those barrels of oil become more and more expensive (as it takes more dollars to buy the same amount of oil)... this price trickles through the economy and is passed directly onto the consumer... who is also having to buy higher priced gas.  Since truckers are the primary means of freight in the country it's easy to figure out how quickly those energy prices spike the price on essentially all goods and services.

- The Affordable Healthcare Act is already discouraging hiring.  Do you think a company with 49 workers is going to hire a 50th?  Do you think a company with 52 workers isn't going to fire 3 of them?

The government has essentially done everything it possibly can to discourage job creation except pass a law that prohibits it, (and even that it has done in some cases such as FINRA not allowing companies to hire beyond a certain regulatory approved point.)  

When the government does subsidize job creation Solyndra happens... where tax dollars are essentially poured into a ditch and lit on fire.  The government can subsidize someone to dig a ditch with a shovel and then fill it back in, but that job... as well as the jobs at Solyndra are economically non-value added.  If they were economically worthwhile someone would already being growing that business and making a profit.  Instead Solyndra filed bankruptcy.  Two other big companies worth mentioning were failures and that is Fannie and Freddie.  While the government didn't outright own them (for a time), it did in a "wink wink nudge nudge say no more" fashion where the politically connected leaders of these companies knew they held no real risk as they bought known toxic mortgages from banks.

I think its pretty clear why someone with the capital to build a factory would choose another Country.

The 1920-23 example was chosen specifically because it shows how, absent of overwhelming regulations, as deflation kicks in and wages and prices drop... standards of living can increase as long as prices aren't artificially propped up and drop faster than wages (which is often the case).  Imagine if you've saved 20,000 in your checking account.  Deflation happens and wages and prices drop... then the purchasing power of that savings doubles...  How great would that be for some low-income earners... sure your iPhone 5 is only worth maybe $150 brand new now... but that's a good thing!  Gas back to under $2 dollars a gallon, Milk back under 1$ a gallon.  When economies are allowed to correct people benefit... instead we're trapped in a recession right now because the Fed won't stop pumping.

Immediately after Harding left office the Fed began pumping money to further stimulate the boom... and from 1923-1929 the Fed increased the money supply by 50%... all the imaginary money found its way into speculative stocks.  The Fed made the easy money and speculation possible, the market found a place for the speculation to happen.  That bubble popped in the same fashion that the housing bubble and dot-com bubbles popped... because the boom was pushed beyond what it naturally would have been by Fed pumping.  Just as in 2008, the Fed was responsible for making a lot of money available... and the government is responsible for driving that excess into the housing industry with other government policies like The Community Reinvestment Act (CRA) and the American Dream Downpayment Act... along with "equality" slogans like building an "ownership society" "improving minitory home ownership."  These laws were supposed to forcefully relax loan standards that Banks did not want to relax... and force banks to make loans to low-income people that couldn't afford them.  The unintended consequences was that now they made owning and flipping homes a very attractive investment opportunity.  The government invented the "mortgage backed securities" to use Freddie and Fannie as a means to free up capital at banks so they could offload those risky mortgages (sold to people who could not afford them by force) get their money back and make ANOTHER toxic loan.  The government created the cycle, and it swelled into a bubble, Banks acted rationally under the laws they were forced to obey.  You think banks want to give someone a mortgage for a house they pay Zero money down on?  Banks don't want that risk... but if they're forced by the government to relax loan standards and can sell those toxic mortgages to Fannie and Freddie... they're doing what they've been told.

The difference between 1929 and 2008 is how the Fed reacted to the bubble popping.  In 1929 the Fed learned that it fucked up and allowed the market to self correct (mostly...), the severity of the depression was worsened by the amount of excess bad investments that had to clear the market... which takes time.  In 2008 the Fed just kept pumping... and its still pumping while the United States is borrowing... delaying and worsening the inevitable correction.  The problem now is worse though, since the United States holds the worlds reserve currency... the upcoming "correction" is going to be global.  ...and we're all about to get another lesson in why fake ass fiat money is the fastest way to loot wealth from the poor and bankrupt a nation.

 

[lumpymunk]

There is no one economic panacea for all economic times. Keep rolling the calender forward from those early 1920's times - by 1929 the economy was roaring along. But that great economic performance was based on people taking on too much private leverage (debt). It was a house of cards and in October of 1929 the cards came crashing down. Then Hoover did exactly what the OP (original post to this thread) says should be done. Austerity. How'd that work out?

The Idea that the New Deal was an austerity measure is probably the most costly piece of revisionist history in America.  Here is how Hoover responded in 1932.

we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

He responded in the exact opposite way that Harding responded, by pushing laws to keep wages high... and called for housing subsidies... paid farmers to burn fields of crops to keep prices propped up while people were starving... and intervened in the economy in every way Harding did not.

Harding - No Intervention - Short quick post-war recession... while slashing the national debt
Hoover - Interventionism - Long depression after 7 years of the Fed pumping up M2 50%... while increasing the national debt.

Hoover's Fed also boosted the money supply After 1929 by 10% in the two weeks after the crash.  Despite that people were hoarding cash (they were expecting the value of their dollars to increase through deflation bringing price and wage drops) which never came thanks to Hoover artificially propping up wages and prices.

The New Deal was not an Austerity measure.

[entropy]

Immediately after Harding left office the Fed began pumping money to further stimulate the boom... and from 1923-1929 the Fed increased the money supply by 50%... all the imaginary money found its way into speculative stocks.  The Fed made the easy money and speculation possible, the market found a place for the speculation to happen.  That bubble popped in the same fashion that the housing bubble and dot-com bubbles popped... because the boom was pushed beyond what it naturally would have been by Fed pumping.  Just as in 2008, the Fed was responsible for making a lot of money available... and the government is responsible for driving that excess into the housing industry with other government policies like The Community Reinvestment Act (CRA) and the American Dream Downpayment Act... along with "equality" slogans like building an "ownership society" "improving minitory home ownership."  These laws were supposed to forcefully relax loan standards that Banks did not want to relax... and force banks to make loans to low-income people that couldn't afford them.  The unintended consequences was that now they made owning and flipping homes a very attractive investment opportunity.  The government invented the "mortgage backed securities" to use Freddie and Fannie as a means to free up capital at banks so they could offload those risky mortgages (sold to people who could not afford them by force) get their money back and make ANOTHER toxic loan.  The government created the cycle, and it swelled into a bubble, Banks acted rationally under the laws they were forced to obey.

The banks were not "forced" into packaging subprime loans in a deceiving manner and inducing the ratings agencies to give the crap packages good ratings. Freddie and Fannie loans did not make up a majority of the subprime loans that went bad that banks gave out. Look at what happened in Texas. Texas law had more stringent loan requirements for banks and Texas weathered the housing bust storm better than most because of it. Texas banks were not "forced" to make bad loans and if Texas banks weren't forced to then no other banks were forced. Individual bankers wanted to make those loans because the people who originated the loans were making a lot of money. I'm not saying that government backing of loans wasn't part of the problem, but it wasn't THE critical part of the problem and I just don't think the banks were coerced into making loans that they didn't want to make - individual bankers were making a ton of money off of it.

[lumpymunk]

Yes Banks were forced into behaving the way they did in the name of "equality."  The government supplied the regulatory framework intentionally to encourage high risk lending, made their intentions clear "this is what we want you to do with this legislation", and then stuffing sub-prime into "mortgage backed securities" and sold them to GSEs Fannie and Freddie (who would "guarantee" them since they were GSEs and could basically do whatever they want).

2000
"the second report to be conducted by the Treasury Department over the next two years, is intended to determine the impact of the Act on the provision of services to low- and moderate-income neighborhoods and people, as intended by CRA."

"On signing the Gramm-Leach-Bliley Act, President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act"."

"In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied "AAA" rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit."

http://en.wikipedia.org/wiki/Community_ ... anges_1999
http://www.jchs.harvard.edu/sites/jchs. ... t-2000.pdf

All comes back to the CRA making securitization of public debt a possibility and making it backed by Freddie.  Not surprising that Bear, Stearns & Co were among the first to fail.

individual bankers were making a ton of money off of it.

This is false because no real money is made until the Mortgages are paid back with interest.  If the banks sell the packaged loans to the Government Sponsored Enterprises (GSEs) Fannie and Freddie, they have recouped their money... but the loan still goes delinquent.  It amounts to a government subsidy for a bank that doesn't need it... but hey at least "low and moderate incoming neighborhoods" get more people in houses (even if most of them defaulted no their loans later).  So the legislation succeeded?

[entropy]

There is no one economic panacea for all economic times. Keep rolling the calender forward from those early 1920's times - by 1929 the economy was roaring along. But that great economic performance was based on people taking on too much private leverage (debt). It was a house of cards and in October of 1929 the cards came crashing down. Then Hoover did exactly what the OP (original post to this thread) says should be done. Austerity. How'd that work out?

The Idea that the New Deal was an austerity measure is probably the most costly piece of revisionist history in America.  Here is how Hoover responded in 1932.

we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

He responded in the exact opposite way that Harding responded, by pushing laws to keep wages high... and called for housing subsidies... paid farmers to burn fields of crops to keep prices propped up while people were starving... and intervened in the economy in every way Harding did not.

Harding - No Intervention - Short quick post-war recession... while slashing the national debt
Hoover - Interventionism - Long depression after 7 years of the Fed pumping up M2 50%... while increasing the national debt.

Hoover's Fed also boosted the money supply After 1929 by 10% in the two weeks after the crash.  Despite that people were hoarding cash (they were expecting the value of their dollars to increase through deflation bringing price and wage drops) which never came thanks to Hoover artificially propping up wages and prices.

The New Deal was not an Austerity measure.

I was thinking of Hoover's initial response through the first year or so of the depression. But you are right, I implied that Hoover was more of an austerian than he was.

Your argument hinges on the pathway out of recessions being better done by austerity. For your argument to hold, it has to be the case that the conditions at the beginning of the recession in the late 1920's was essentially the same as the beginning of the recession of the early 1920's. I don't see that. The magnitude of the private deleveraging that had to happen was much greater. When the magnitude of deleveraging gets so large, private business can take an extremely long time to get the virtuous circle of demand and supply going again.

[lumpymunk]

Your argument hinges on the pathway out of recessions being better done by austerity. For your argument to hold, it has to be the case that the recession in the late 1920's was essentially the same as the recession of the early 1920's. I don't see that. The magnitude of the private deleveraging that had to happen was much greater. When the magnitude of deleveraging gets so large, private business can take an extremely long time to get the virtuous circle of demand and supply going again.

The linking thread between them is that in all situations a "bubble" forms where investments end up in the wrong place and have to be liquidated and reallocated once the bubble pops.  This is a natural market correction where the cumulative population realizes mistakes have been made, and untenable positions are abandoned.  This means bankruptcy, loss of savings, etc... for those foolish enough to partake in the speculative activities that produced the bubble.  The more incentives government gives for every day citizens to partake in the speculation, the more people will be damaged by the correction.

In 1920 it was a bubble created by Woodrow Wilson financing a war by selling bonds to the Federal Reserve.  Before this the Fed was unable to purchase bonds from the U.S. government as this was considered out of scope... so they just changed the law!  Neat how they just do whatever they want whenever they want... kinda like how they created the debt ceiling shortly after... and change that whenever convenient now to.  After the war Veterans flooded the job market, driving wages down and the bubble was popped by soaking up excess currency by paying off war bonds... and slashing the national debt to allow prices to fall in line with wages... raising employment and adjusting to a peacetime economy.

In 1929 it was a bubble created by 6 years of Federal Reserve expanding the money supply after Harding left office and policies changed.  It was completely unnecessary like a body builder already on steroids pounding energy drinks to get the high as high as possible.  Once the Fed makes easy money available the market will find a place for speculative investments.  The stock market became the target.  Once everyone realized that the money was imaginary the bubble popped.  The recession was lengthened and worsened into a depression by The New Deal... which as already pointed out was not some free-market lovers dream... but central planning at its finest.

In 2008, as previously explained, the bubble was created by the Greenspan's Fed making easy money available through low interest rates (encouraging banks to lend), and the Government providing the legal framework for secularization of loans via the CRA and Freddie Mac guaranteeing the loans.  Politically this was driven by perceived "inequality" where minorities did not own homes.  Meanwhile you had "intellectuals" like Paul Krugman suggesting that the best way to boost the economy after the DotCom bubble was to replace it with a Housing Bubble.

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

He denies having said this post-collapse.

http://www.nytimes.com/2002/08/02/opini ... e-dip.html

...and so all of the relevant legislation was already linked and explained in a previous post which once again holds the government primarily responsible. While the circumstances of each "bubble" are different, the cure is the same... the market must be allowed to correct itself.  The idea that the government can provide "stimulus" and "bailouts" to ease the correction has proven false both in 1929 and in 2008.  The tactic in recent history has been to replace one bubble with another, so liquidated positions can be supplanted with speculation in other positions... which is why there was no correction after the DotCom bubble.  It was merely replaced... so now in 2013 we have almost 20 years worth of cumulative speculative positions to liquidate.  The rate at which we're digging deeper into debt has never been this accelerated and the recovery from this recession has never been slower.

...and its so slow because the recovery hasn't even begun yet.  It won't begin until the market is allowed to correct.

[entropy]

//http://krugman.blogs.nytimes.com/2012/01/23/more-than-you-want-to-know-about-warren-harding/?_r=0

[lumpymunk]

Additionally, one of the claims made by the quantitative easing critics is that inflation will take off. They have been saying that for years now and there is no sign of inflation taking off yet. Do a search of Paul Krugman's blog (//http://krugman.blogs.nytimes.com/) for "liquidity trap".

Whats funny is that Krugman's line of thinking has been so predictable throughout all of this... he's been advocating higher inflation.

If nothing else, we've learned that the liquidity trap is neither a figment of our imaginations nor something that only happens in Japan; it's a very real threat, and if and when it ends we should nonetheless be guarding against its return — which means that there's a very strong case both for a higher inflation target, and for aggressive policy when unemployment is high at low inflation.
The bottom line is that the Fed almost surely won't, and very surely shouldn't, start raising interest rates any time soon.

At what point does it "run away" ?  It's already running away because no politician has the balls to stand up and say enough is enough.  It's political suicide to suggest "soccer moms" and "Joe Plumber" have to go through some hard times to fix the economic damage the government has done.