The 1930s: the American strategy

The economist JK Galbraith was a witness in the congressional hearings about the US stock market which took place in March 1955. Galbraith's book on the 1929 crash had been published a year earlier and the gathering was keen to hear what he had to say. He suggested that "history could repeat itself", though he resisted predicting when. During that day, $3 billion was wiped off the value of the New York Stock Exchange.

Now, on the edge of its worst economic crisis since 1929, the United States can't quite contemplate history repeating itself again. Facing a deep recession, growing unemployment, a failed banking system and serious troubles in manufacturing, Barack Obama is reported as understanding that unless his new administration does something very big very quickly, the effect they'll have on the crisis will be "like a popgun".

Many US newspaper columnists have said their country needs "a new FDR" and needs him badly.

Franklin Delano Roosevelt became the 32nd US president in March 1933, winning an election that was fought at the onset of the Great Depression which followed the 1929 crash. Some $75bn in equity capital disappeared into thin air on Wall Street. US GDP fell to $74bn from a high of $104bn, with US exports crashing 62%. Unemployment was 25% of the US workforce - 13 million people were looking for jobs. In Chicago, Obama's base, 40% of the workforce was unemployed. In Detroit, motor city, it was 50%. In the downturn, 11,000 banks had closed.

Obama doesn't face a crisis on this scale, but the expectations of hero-in-waiting are the same. Unemployment in the US is close to 7% and rising. The stock market is down 35% from where it was last year. The decline of US GDP is the fastest since the terrorist attacks of September 11, 2001. Consumer spending is down and US house prices have slumped, tipping millions of home owners into negative equity. On any technical definition of a recession, America is in it, and bad.

FDR inherited the presidency from Herbert Hoover who believed that the remedy for getting the US out of the depression was to focus on the banks. Large loans were offered to US banks in the hope that confidence would return - yet the queues for people waiting to take their money out got longer. Federal loans for public works projects, which would have shortened the dole queues, were only approved if they could guarantee a revenue stream to pay back the loans.

Obama takes over the White House on January 20 and, like FDR, he'll take over a crisis management strategy that's focused on restoring confidence and financial credibility to failing banks. Just as it didn't work for Hoover, it didn't work for Bush, either.

Only last week the US Treasury showed a degree of flexibility, pumping an additional $800bn into the mortgage and consumer credit market. This comes on top of the $700bn "troubled asset relief programme", the Congress-backed package aimed at rescuing America's failed banks. When Hank Paulson admitted last week that millions of Americans could not borrow any money last month, the US Treasury secretary was effectively admitting banks were still not functioning despite the bail-out.

If the early signals are reflected in fast-tracked legislation post-January 20, America is in for a re-run of FDR's "New Deal" under Obama. After 70 years of sophisticated digitally-driven economic forecasting and evolution, America is returning to the raw economics of the 1930s.

The size of the stimulus plan he has in mind has already been discussed by the House speaker, Nancy Pelosi, and the majority leader, Harry Reid. Both Democrat leaders and Obama are said to hold hopes of a stimulus plan of up to $100bn being passed before the end of this year, with the scale of the post-January package being estimated at a further $1000bn.

Obama hasn't contradicted the trillion-dollar figure being bandied about. Instead, he's tried to offer assurances that it can be done, saying it is "imperative" that wasteful spending be cut and that the federal budget needs reformed.

Obama's "new deal" will initially centre on axing federal spending that he believes has outlived its usefulness and redirecting the cash to places it can have an immediate effect. But efficiency cuts don't add up to a trillion bucks.

So its difficult to gauge before January 20 just how much of FDR Obama really wants to copy. An emergency banking act? Federal emergency relief? A public works programme to get the unemployed back to work? In his first 100 days FDR enacted 15 major laws and established a range of federal programmes that tried to put America back to work. However, four words are singled out from his 1932 inauguration address that are said to have had the greatest impact. He promised "action and action now".

If Obama says something similar on January 20, and a struggling America believes him, his "new deal" will have begun.