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Will the Bailout lead us into the next great depression?

Discussion in 'Economics and Financials' started by adamprez2003, Oct 1, 2008.

  1. adamprez2003

    adamprez2003 Senior Member

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    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
     
  2. texasPHINSfan

    texasPHINSfan New Member

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    i think you make a lot of good points adam.... the only caveat i'd add there is that we don't yet even know the language of this revised bill and we don't know the legislation that will be passed in the upcoming months. surely as more institutions fall, there will be more over-regulation from our friends in D.C.

    i'd hesitate to compare this to the great depression, where there were certainly a LOT more factors contributing to the collapse other than a financial industry blowup.
     
  3. adamprez2003

    adamprez2003 Senior Member

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    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
     
  4. Regan21286

    Regan21286 MCAT's, EMT's, AMCAS, ugh

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    Interesting comparison, never thought of that. I may disagree with you on McCain vs. Obama but still some good points.
     
  5. FiN.in.RI

    FiN.in.RI Paul pierced through..

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    350 billion up front
    250 billion would have to come with congressional approval and i forget where the other 100 billon gets put into play..

    more oversight
    less exec pay..
    FDIC up to 250k

    amended bill passed the Senate.. House will vote Friday
     
  6. Paul 13

    Paul 13 Chaotic Neutral & Unstable Genius Staff Member

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    Does the house vote on the bill as is on Friday, or can they add their own crap to it?
     
  7. adamprez2003

    adamprez2003 Senior Member

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    As is, they cant change a word
     
  8. texasPHINSfan

    texasPHINSfan New Member

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    wow, talk about cliff notes! in all honesty those terms aren't even the ones that anyone ever really disagreed with... it's all the other language, and source of the funds that helped to be a big problem for everyone.

    but yes, i guess ultimately something was going to get passed.... hopefully this "works", although it will take months before it takes effect and we see anything.
     
  9. Paul 13

    Paul 13 Chaotic Neutral & Unstable Genius Staff Member

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    Hmm... well the report I just saw made it seem like some in the House are trying to add more stuff to it.
     
  10. adamprez2003

    adamprez2003 Senior Member

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    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
     
  11. texasPHINSfan

    texasPHINSfan New Member

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    i'm not going to lie, i'm hearing so much different things from different sources i am having a hard time following what is going on with that. i heard they were making adjustments too, which led me to ask what you just did adam.... but whatever, i guess they'll figure it out.
     
  12. Paul 13

    Paul 13 Chaotic Neutral & Unstable Genius Staff Member

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    yeah, I'm hearing some house republicans want to lower it to 250 billion...
     
    texasPHINSfan likes this.
  13. texasPHINSfan

    texasPHINSfan New Member

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    really? GOOD!

    to avoid confusion, the original bill was only supposed to allot $250B initially for Paulson's carte blanche use, and then the following amounts need to be approved (but already allocated to the bill) before they are used.

    if they limit it to $250B and use it for the most distressed debts, that (to me) is more favorable than using $700B.
     
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  14. FiN.in.RI

    FiN.in.RI Paul pierced through..

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    The source of funds never really changed, you and I are still the source and ya gotta start somewhere. Kinda like drilling offshore...... Anyway, those were the terms that were highlighted on CSPAN as the bill was approved by the Senate. I didn't have the time nor drive to explain any deeper.
     
  15. jdang307

    jdang307 Season Ticket Holder Club Member

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    Couple questions. Does the current market crash match the severity of the one during the depression? I don't have those handy.

    Second, what was the GDP like during the depression, and what is the current one?
     
  16. adamprez2003

    adamprez2003 Senior Member

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    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.
     
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