2010 Has Already Happened. In 1931
Roberto Artoni and Carlo Devillanova had already delved into the issue in late 2008. Now they emphasize how in 1931 policy-makers were similarly convinced that the worst of downturn was behind them and recovery was in the making, when strong financial turbulence (after the Credit-Anstalt went bust) and Britain abandoning the gold standard forced them to reconsider their views. In the United States, this led, "to major gold outflows in a convertibility regime, increase in domestic interest rates and more widespread bank failures".
President Herbert Hoover, in order to defend the dollar, tightened fiscal policy (by calling for a 33% increase in tax receipts, so that "In 1932 financial collapse was avoided, but the economic recession went on without signs of improvement (in fact, nullifying the signs of recovery that had earlier manifested themselves," as Artoni and Dellanova write.
By 1933, when the financial crisis resurfaced, FDR had evicted Hoover from the White House and he called for completely different government interventions: "He revoked the dollar's convertibility for residents; he suspended gold exports; he temporarily shut down banks (...); he authorized the Federal Reserve to make loans without limitations on the character of the security accepted", thus giving economic policy the flexibility it had lost and creating the macroeconomic conditions to launch the New Deal.
The crisis we are going through, as the two researchers summarize, is characterized by sharp fall in industrial production (-13% at the trough, with respect to April 2008; it was still -6% in February 2010), public indebtedness worsened by at least five percentage points in all major countries, with a consequent growth in the burden of public debt (the debt-GDP ratio has grown by 30% on average). Even the IMF attributes only a tenth of the increase in public debt to fiscal stimuli passed by governments. In such a context, a restrictive fiscal stance could be not only unhelpful, but also damaging, as Hoover's policy decisions were.
"If US historical experience has to teach us something," Artoni and Devillanova argue, "is that an effective action to counter speculative pressures requires significant institutional changes." Back then it was about going off gold, today it could be about transferring some of the debt of individual EU countries to a European central government.
Artoni and Devillanova conclude by expressing their skepticism on cutting social spending. Presumably, targeting social spending won't yield the expected results in staving off the speculative forces that are characterizing current trends in financial markets. To the contrary, cuts in social spending could cause "a major weakening in social cohesion and the quality of civic life, given the polarization in the distribution of income and the inadequacy of private insurance markets in covering against social risks."