The Great Depression was a horrible and extremely painful experience. But we did learn something extremely valuable from this experience: how to get out of a depression. The answer came in the form of the massive government stimulus associated with World War II. At the peak of the war, our deficits exceeded 20 percent of GDP. This would imply deficits of more than $3 trillion in today's economy.

This is important. We know how to keep the economy from collapsing. We didn't have this information 80 years ago. The secret is to spend money, lots of it.

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Henry Paulson's main claim to fame is getting just about everything wrong in his tenure as Treasury secretary. However, he now stands to gain lasting notoriety as the person who destroyed the domestic U.S. auto industry, and the economies of the Michigan, Ohio, and Indiana along with them.

The story is that the big three automakers are struggling with record sales declines. This collapse in car sales in turn is the fallout from the collapse of the Greenspan-Bernanke housing bubble. While the domestic automakers have been hit hardest, all manufacturers have seen sharp drops in sales. Toyota's sales were down 23.0 percent compared with its year ago levels. Honda's sales were down 25.2 percent, and Nissan's sales fell 33.0 percent.

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The headline of a front page article in the Washington Post tells readers how Treasury Secretary Henry Paulson changed his approach to the economy in response to "this storm."

That is so sweet of the Post. We are looking at an entirely preventable economic catastrophe that was brought on by the policies supported by Mr. Paulson and the rest of the Bush administration, as well the Greenspan-Bernanke Fed. And, these were policies that Mr. Paulson personally profited from, earning hundreds of millions of dollars in his years at Goldman Sachs.

But in order to avoid reminding readers of Mr. Paulson's culpability, the Post describes the economic crisis as a "storm," implying that it was some sort of unforeseeable natural disaster that came out of the sky. This is the sort of reporting that you would have expected from Pravda in the days of the Soviet Union.

Remember way back in October when all right-minded people supported Treasury Secretary Henry Paulson's bank bailout package, which went under the name of Troubled Assets Relief Program (TARP)? Those of us who thought it was poorly designed as a mechanism to help the financial system, and was likely to lead to taxpayer enrichment of the extremely rich, were denounced as knuckle-scraping Neanderthals.

Of course Paulson changed course a week after he got his bailout bill and decided that the best route was to directly inject capital into the banks, as advocated by the knuckle-scraping Neanderthals. Last week the knuckle-scraping Neanderthals could claim a second victory as he announced that the TARP program was officially dead, RIP.

But in Washington, no bad idea stays dead for long.

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Those following the meeting of Barack Obama's economic advisory committee could not have been very reassured by the presence of Robert Rubin and Larry Summers, both former Treasury secretaries in the Clinton administration. Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.

It is important to separate Clinton-era mythology from the real economic record. In the mythology, Clinton's decision to raise taxes and cut spending led to an investment boom. This boom led to a surge in productivity growth. Soaring productivity growth led to the low unemployment of the late 1990s and wage gains for workers at all points along the wage distribution.

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Those following the meeting of Barack Obama's economic advisory committee could not have been very reassured by the presence of Robert Rubin and Larry Summers, both former Treasury secretaries in the Clinton administration. Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe. 

It is important to separate Clinton-era mythology from the real economic record. In the mythology, Clinton's decision to raise taxes and cut spending led to an investment boom. This boom led to a surge in productivity growth. Soaring productivity growth led to the low unemployment of the late 1990s and wage gains for workers at all points along the wage distribution.

At the end of the administration, there was a huge surplus, and we set target dates for paying off the national debt. The moral of the myth is that all good things came from deficit reduction.

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Former Treasury Secretary Larry Summers' name is consistently placed prominently on the list of candidates to be President Obama's Treasury Secretary. This is rather striking since the policies he promoted as Treasury Secretary and in his subsequent writings led to the economic disaster that we now face.

As Treasury Secretary, Summers embraced the high dollar policy promoted by his predecessor Robert Rubin. While it offered short-term benefits in the form of cheap imports and lower inflation, the high dollar also produced a large and growing trade deficit. Just like tax cuts that cause unsustainable budget deficits, the high dollar policy of the Clinton years was unsustainable over the long-run.

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It would be a really bad start to his administration if President Obama picked a Treasury Secretary who shares a substantial part of the blame for the bubble economy and the financial crisis. It will not be easy to pick up the pieces and get the economy back on its feet, but we would be going in the wrong direction to put one of the people responsible for getting us in this mess in the top economic position in the Obama administration.

Sheila Bair, the current head of the Federal Deposit Insurance Corporation, can boast of clean hands. Unlike other contenders, she never obstructed regulation of the $60 trillion credit default swap market. Nor did she push to maintain the over-valued dollar that gave us an $800 billion trade deficit. Unlike many others dealing with the fallout from the housing crash, she has noticed that people are losing their homes and has made preventing this a top priority.

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President Obama will have a historic opportunity to establish himself as a truly great president in his first days in office. He can take advantage of the current economic crisis to announce plans to jump start national health care insurance. Extending health care insurance can be an effective stimulus that will provide an immediate boost to the economy.

More importantly, it will provide the same access to health care that people in other wealthy countries have long taken for granted. For this accomplishment, President Obama will rank alongside Presidents Roosevelt and Lincoln as one of the nation's truly great presidents.

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I was on the Bill O'Reilly show last night and placed in the position of defending Barney Frank against the charge that he was largely responsible for the housing bubble and crash. I have occasionally had bad things to say about Frank myself, so I don't mind O'Reilly or anyone else criticizing him, but this one seemed more than a bit over the top.

O'Reilly blamed Frank for protecting Fannie Mae and Freddie Mac in their unsound lending practices. I made the obvious points that Fannie and Freddie were followers, not leaders in this mess (they lost market shares to the private sector whiz kids). More importantly, Frank didn't even take over the Financial Services Committee until January of 2007, after almost all the bad loans had already gone out the door.

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We all know how hard it is to get by on tens of millions of dollars a year. That is why the Washington Post was near hysterical in its support of the Wall Street bailout earlier this month. They argued that if we didn't give $700 billion to the banks right away that all hell would break loose.

Those who wanted to put conditions that ensured that the money didn't go into the pockets of shareholders or top executives, or even that the bailout was done the right way through direct injections of capital (as it eventually was) were denounced as reactionary Neanderthals. So, the bailout went through and the Wall Street executives are now getting tens of millions in compensation, courtesy of average taxpayers.

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The Washington Post reports today that the next round of bailouts will be for the insurance industry. The article tells us that we can expect similar bailout conditions for the insurance industry as were given to the banks that received capital from the government.

In other words, the insurers will be given government funds at far below market rates. This is a direct handout from taxpayers to the shareholders at these institutions, as well as the top executives whose incompetence brought them to the edge of ruin. While the Post tells us that there will be limits on executive pay, these restrictions were put in just to fool children and reporters, serious people know that they are a joke.

Let's stand up for Joe the Plumber and stop giving tax dollars to the incredibly rich.

Alan Greenspan has finally acknowledged that he may have made some mistakes in allowing an $8 trillion housing bubble to grow unchecked. (Look for rivers flowing upstream.)

This modest act of contrition should be welcomed, but analysts have been far too quick to describe Greenspan as a prisoner of his free market ideology and the current crisis as a story of the free market running wild. This is far too generous a description of Greenspan and the current economic situation.

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In case you've missed the hype, IOUSA is a documentary making the case that the U.S. budget is hopelessly out of control and that our current spending patterns will bankrupt our children. The film features such noteworthy characters as Alan "Bubbles" Greenspan, Robert "Don't Regulate Credit Default Swaps" Rubin, and former presidential candidate Ron Paul.

This film should be viewed as part of a larger effort to dismantle Social Security and Medicare, the country's core safety net programs. The reality is that our budget is essentially fine, it is our health care system that is out of control. But fixing health care would require going after the drug companies, the insurance companies, and highly paid medical specialists. But those folks are all powerful, so the IOUSA crew went after old people instead.

You can get CEPR's movie review here.

Last week, Associated Press ran a piece profiling several potential candidates for the next Treasury Secretary. The candidates had one feature in common with all prior Treasury Secretaries, they are all white men. This fact is especially egregious because one of the most obviously qualified candidates is a woman: Sheila Bair, the current chairperson of the Federal Deposit Insurance Corporation (FDIC).

During ordinary times, the FDIC is a relative backwater, having to deal with minor policy tweaks or the failure of a small bank here or there. However, the housing crash has put the FDIC at center stage. Ms. Bair has been forced to arrange the takeover or merger of many of the country's largest banks, including Wachovia, Washington Mutual, and IndyMac. The FDIC has been a key actor in containing the credit crisis.

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