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Harper, Cameron 'have learned nothing from Herbert Hoover': Economist

Dr. Sherry Cooper, chief economist of BMO Financial Group, today warned that a recession is looming and Prime Minister Stephen Harper is pursuing exactly the wrong policies to avert it.

In her newsletter The Bottom Line, Cooper wrote:

Evidence mounts around the world that the economies of both developed and developing countries are slowing and consumer confidence is falling. Many believe that central banks are unable (or, in the case of the ECB, unwilling) to cut rates further.

The Fed's most recent policy initiative, Operation Twist, to flatten the yield curve was met by a dramatic selloff in stocks and commodities (even gold), as few believe the Fed's plan will have a meaningful impact on housing, the source of the household balance sheet crisis. Moreover, a flatter yield curve will dampen already-troubled bank earnings, and the plunge in long-term bond yields will exacerbate the underfunding of pension funds.

In addition, the misplaced belief that the road to economic prosperity is paved by near-term fiscal tightening, as espoused by our own Prime Minister Stephen Harper and British Prime Minister David Cameron last week, shows we have learned nothing from Herbert Hoover's response to the Great Depression.

Just as during the current Great Contraction, in 1930, the U.S. federal budget surplus had turned to a deficit that grew rapidly as the economy contracted. Hoover recommended large tax increases, which were approved by Congress in 1932, further exacerbating the rout. By the time Roosevelt entered the White House, countercyclical fiscal policy was widely accepted as a legitimate function of government.

Countercyclical fiscal policy has now become unpopular and misunderstood. Yet, we are in danger of repeating the deflationary policies that caused the 1929 stock market crash and the Great Depression.

Crawford Kilian is a contributing editor of The Tyee.

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