Will the Bailout lead us into the next great depression?

Interesting paralells between now and the great depression of the 20s and 30s. Although many may still believe that it was caused by wall street, I believe most economists have finally come around to understanding that it was Federal policies in dealing with the speculation that caused a bump in the economy to become a full blow depression. Here's an exerpt listing the similarities

As the political picture of the 2008 electoral transition comes into clearer focus, personality parallels with the 1929-39 period appear. The current presidential candidates eerily mirror the presidents who presided over the Great Depression.

John McCain is Herbert Hoover, full of populist denunciations of Wall Street that clearly come from the heart, but devoid of effective solutions to the economic problems the US faces. We can imagine McCain in the White House, after a year or so during which the economy proves recalcitrant, adding to the national pessimism by scowling angrily for the cameras at a fate that has left him confronted by a problem he cannot solve - or possibly borrowing some leftist solution like Hoover's 1932 tax increase that makes matters much worse. As in 1931-32, the electorate would soon be counting the days until 2012, when another choice could be made.

As for Barack Obama, he is nothing more nor less than Franklin Roosevelt, empty rhetoric and all. "We have nothing to fear but fear itself!" rivals "Yes, we can!" in its mindless uplift and lack of specificity. Like Roosevelt, Obama would be full of clever ideas to solve the nation's economic problems; like Roosevelt's, his ideas would mostly be half-baked leftist panaceas that did more harm than good, prolonging the downturn and leading the nation a substantial distance further towards the nightmare of the leviathan state. His rhetoric is so good, however that the electorate would not notice his economic failures and would happily re-elect him as they did Roosevelt in 1936.

Given the grim political prospect ahead of us, we can now examine the checklist for Great Depression causation, and see how many we can check off for today's leaders:

Asset price crash: Check! We�ve already had the crash in asset prices, twice, in 2000-02 with stocks and now with housing. As the stock market crash of 1987 demonstrated, asset price crashes don't necessarily lead to Great Depressions, but they do thoroughly shake the financial system and reveal hidden weaknesses. This time around, there have been plenty to reveal.

Protectionism: Yes, but less severe. Protectionism is definitely reviving, but to nothing like the level of the Smoot-Hawley tariff. Obama's threat to renegotiate the Northa America Free Trade Agreement, combined with a substantial recession, could produce a substantial leap in protectionism. We can however have at least moderate confidence that Obama has no intention of actually doing anything so foolish as to reopen trade agreements in the middle of an economic downturn.

Bank failures: Check! We need an actual bank or two to go under however, not just these investment banking houses of cards, and we need an international bankruptcy along the lines of Creditanstalt. My money would be on one of the thoroughly opaque Chinese behemoths. The Fed and other central banks will doubtless try to avoid a collapse of the money supply following a bankruptcy; they may simply produce hyperinflation, a problem we didn't have in the 1930s.

Expansion of the public sector: Check! Treasury Secretary Hank Paulson�s US$700 billion housing bailout fund certainly qualifies here. Commentators have noted the similarity to Hoover's Reconstruction Finance Corporation, without noting that the RFC was a colossal economic failure. It diverted resources to politically selected companies, increasing the level of federal debt raising and thereby crowding truly private sector entities out of the capital market. The diversion of resources from the private to the public sector was itself deflationary, weakening the system�s productivity growth potential and deepening the downturn.

Treasury Secretary Henry Paulson appears to be operating on the basis that federal resources are essentially infinite. A $700 billion bailout and the $1 trillion deficits to which it will lead will "destruction test" this bizarre theory. Obama's spending plans, which presumably won't be abandoned altogether, will also be a problem here, Indeed it is likely that by 2012 the ratio of federal spending to GDP will be at a new high level never before seen in peacetime. As with bank failures, this time around an excessively accommodative Federal Reserve is likely to monetize the additional debt and thereby cause rapidly accelerating inflation.

Tax increases in a downturn: Probable. Obama has already promised tax increases, which he will probably make larger than planned to attack the $1 trillion deficits. That's precisely the mistake Hoover made. McCain hasn't promised tax increases, but appears to have no great philosophical objection to higher taxes and a commitment to reducing the deficit - it thus looks like tax increases will be forthcoming from him, too.

Abandonment of capitalism: Probable. The principles of capitalism will have little popular support in the years ahead, as in the 1930s. Hence there will be no immediate opposition (other than from politically discredited industries) to daft new schemes of regulation that destroy market incentives. Obama has some idea how markets work, but the barons in the congressional Democrat majority don't, so there is likely to be some truly damaging legislation in our future. Even if McCain becomes president, he appears to have no instincts as to which controls and restrictions would wreak most destruction so "compromise" legislation with congressional Democrats might be as bad or worse than under a president Obama.

Destruction of capital markets: Possible. This is the big question-mark. In the 1930s, the Glass-Steagall Act, by separating investment banking from commercial banking at the bottom of a recession, when capital was scarce and entrepreneurial spirits non-existent, produced investment banks that were truly undercapitalized and indeed unprofitable - even Merrill Lynch, among the largest of them even then, lost money over the decade of the 1930s and survived only through subventions from Charles Merrill's mother's trust fund. The result was a level of capital-raising in bond and stock markets throughout the late 1930s that was below that at the bottom of the 1920-21 recession, in a much larger economy. It is not unimaginable that draconian legislation along the same lines, backed by popular outrage against Wall Street, might have a similar effect.

Thus not all of these factors operate to repeat the 1930s exactly; on the other hand, some of them merely promise a more inflationary version of that sorry decade, which would probably be even more unpleasant. While a re-run of the Great Depression, with or without hyperinflation, is still by no means inevitable, we are a lot closer than we were a month ago.

Asia Times Online :: Asian news and current affairs

 

Oh I agree. Way to early to start down that road. So many other things would have to occur. But I do find it interesting that we seem to be finding the same so called solutions to these problems 80 years later. Hopefully history doesnt repeat

 

As is, they cant change a word

 

Really? If that happens I believe they have to send it back to the Senate. Not sure since bills are supposed to originate in the house to begin with

 

Well from the peak in 1929 to the valley of 1932 the market lost 89% so no we're nowhere near the severity of that. If you bought stocks at the peak it would have taken you 25 years just to break even. Thats why the cliche that alot of financial advisors use that the stock market consistently outperforms all other investments is false. It all depends on timing. entry and exit points determine profit and loss. sounds simple right? lol.