I just read a fascinating and illuminating article on the current financial crisis, as compared with the Great Depression: What Would Keynes Do? by Bruce Bartlett for Forbes Magazine. In the article the author asserts that the main problem with our economy is deflation, that is, falling prices. While most of us delight in lower gas and housing prices, after the recent run-up in these items, it’s deflation that can inflict the most damage to our economy, when the cost to the produce goods exceeds the sale price, leading to job layoffs.

The credit crunch has led to less money in the system, money people need to buy cars and houses, and to get student loans. The problem now is not simply the credit crisis, but fighting deflation. We have to catch it early, and the solution, according to the British economist John Maynard Keynes, is massive government spending on tangible items, resulting in decreased supply and higher prices, and giving a lot of people jobs, so they have the money to go out and buy stuff, which also helps prop up prices.

With the Federal Reserve doing all in its power to pump money into the system and be the lender of last resort, and with the swearing in of Barack Obama as the next president and a majority democratic congress to support him, I believe there is hope we can stave off another Great Depression. While this is difficult for me to admit, coming from a fiscally conservative background, I’m afraid it’s the only medicine that will cure the patient and prevent the economy from dying. I still belief in capitalism over socialism, but capitalism must be tempered to prevent unchecked greed from damaging it. The speculative bubbles in tech, housing and oil have all burst, bringing us to this point. We may now have to err on the side of socialism for a while to correct it, which is unfortunate, but I think it’s the only way to restore our capitalist system to its proper balance.