4 Ways to Turn a Recession Into a Depression by James Pethokoukis

September 18, 2008 02:22 PM ET

Hoo, boy. Wall Street, as well as America's Investor Class, ought to find the following statement reassuring. Here is Senate Majority Leader Harry Reid on the credit crisis, "No one knows what to do. We are in new territory here." Well, my first piece of advice would be to do nothing. Punish Wall Street? The market is already doing that. Crack down on super risky home loans? The market is already doing that, too.

Moving forward, however, Washington might want to crack open some history books and examine just how bad policy from Washington turned an economic downturn into the Great Depression. Here are handy tips for what not to do:

1) Close the banks. This is the biggie—not letting the financial system disintegrate. Thank goodness it is already being handled by de facto copresidents Hank Paulson and Ben Bernanke. (In the end, though, the American taxpayer may well have to provide M.O.A.B.—the Mother of All Bailouts.) Indeed, Bernanke is a student of the Great Depression and understands well the key role of the Federal Reserve in such a crisis. In fact, he has explicitly blamed bad Fed policy for turning a 1920s downturn into a 1930s economic catastrophe.

2) Raise taxes. Another classic. The Revenue Act of 1932 was at ... read on