Memo To Chicken Little On The Economy: The Sky Is Not Falling

If everything is fine with the economy, why do we need a $700 billion bailout?

I don't think many are saying we are IN the great depression. What I am hearing is that we are on the verge of a collapse that heralded the beginning of the great depression. As much as I want to believe you, this chart:
http://www.shambhala.org/business/goldocean/cau...
shows unemployment below 5% in 1929.

Growth
"During the half-decade from 1924 to 1929, the U.S. economy grew at an average annual rate of 3.4 percent."
http://www.aei.org/publications/pubID.6022/pub_...

stock market was actually growing: http://people.few.eur.nl/smant/m-economics/cras...

banks - "During the 20s, there was an average of 70 banks failing each year nationally. After the crash during the first 10 months of 1930, 744 banks failed "
http://www.livinghistoryfarm.org/farminginthe30...

and i hope the FDIC stops bank runs

I could go on, but I think my point is made ;)

reading over the MSN article description:
http://encarta.msn.com/encyclopedia_761584403/g...
is a little scary in terms of the parallels:
tax cuts for the wealthy
bad decisions on lending

so, don't mean to go chicken little on you, but I'd feel better if you had some facts that tell us why our current situation is unlike the situation just prior to the crash of '29.....

Your point is that it's not quite as bad as the Great Depression, so we should just lay back and enjoy it? The Great Depression, which lasted a decade, and after massive infusions of gov't welfare only ended with the onset of World War II, and a massive military draft. Hey, at least it was work. And if you were lucky enough to get into the Navy, "three hots and a cot." 'Til the torpedoes hit.

No the sky isn't falling - the rug is being pulled out from under us.

chmbrln: These are some good links, especially the first one, which is excellent. Thanks!

dear Chmbrin. me too, facts would help. Yet, facts are hard to come by. Comparisons and guesses and opinions are coming in by the Niagaras. Because this is so entirely a different structure and time, it may not be that facts can yet be had. I would like the candidates particularly, but it's just my two cents worth, to not be so fast to non-analyze and condemn this and that, and instead STUDY the parts of this issue that do not show above ground. There's far more to a failure of oversight of this magnitude than just a guy asleep at the wheel.

Im leaning far out the window with you Elrod, too, about us'ns winding up owning a huge insurance co and etc, since last week. For a minute there, I thought we weren't in Kansas anymore, more like Soviet Kansas it seemed to some.

and Mike_P, I'm no quite old enough to have lived it, but my parents did, TGD, and the president of the US was slow to act, left the very poor in the most egregious state for years. You're right that that was then. It may be then as now. But also, the quickness and decisiveness the gov moved with last week is way way different than 1929. If you read about how the governors and congressmen and senators turned their backs on the poor during those years, truly, it might make you cry. It made me cry. The suffering was so unrelenting and yet a good deal of news media was swooning over the few moguls who took their lives. You're right, there's more than one way to kill people while letting them live.

Too, Patrick, what you are saying here goes along with what the best finance-minds I know are saying in a slightly different way... that such ballast blasts occur in a deregulated, capitalistic paradigm; that it resets itself by going to the nadir. Probably true, but for many too too true and painful while they wait, worry it out, esp those who already live with one leg dangling in thin air already.

i'd agree that no one should go running down to their bank and taking out whatever money to stuff the mattress with. But also, dont you wish that we taught basic econ in gradeschool, so young adults would know what to listen for, and pounce, and roar before these profound pillaging matters are let go on for decades with only just a few scattered protests that never can gain enough traction to make 'the machine' stop? There has GOT to be a better way. Seems like the CIA ought to be put on the case.

In the meantime, I'll be interested to know which clique at the SEC will b e indicted first. I'm sorry it comes to this; it is egregious and maddening. When I wrote an article at TMV a few months ago on a 'usual' 30% interest rate on credit cards, the response was sort of ho-hum. My questions are many; one certainly is, why in the face of grotesque usery do not people rise up, even then? Bless us all.

dr.e

1929 could never happen again. Even in an unregulated society as was the case of 1929. The reason is simply that the US has in place a 115 trillion dollar economy and thus this melt down accounts for less roughly 1/2 of 1 percent of our economy.

This is precisely why the government feels license to borrow and it is why foreign nations have no compunction to not lend us money. For the US to borrow 240 billion a year to pay its bills is akin to Donald Trump taking out a loan to buy a new Television. No ones gonna turn him down and the amount lent is insignificant.

That is UNTIL you lend him the money to buy 250 new tvs year after year after year and then he suddenly begins to only want to pay the interest and not the principal. Then after awhile all those TV's start adding up.

That is where we are today with the national debt. Its starting to add up and that is one of the driving forces not only for our nation but our financial institutions that are charging the typical customer 8-32 percent interest with late fees and over the limit fees and so on. Greed drives greed drives stupidity.

The sky IS falling, however it is falling on the heads of those lending institutions who have chosen greed over reason because they can and hey....everyone else is doing it so we should to.

Fire them all because they are all responsible for this mess. But you wont. There is an old saying. Everyones congressman sucks but my own. That is why year after year the GOOD OLD BOYS return and year after year they laugh at us.

Another problem in 1929 was the collapse of the farm economy in the early 1920s. Outside the urban middle class nobody could afford any consumer products that were increasingly central to the economy. That's why they needed to increase consumption AND encourage cuts in agricultural production.

Patrick, thank you for the needed reality check. The economy in fact is doing poorly, and we are seeing severe problems with mismanagement and outright mischief on Wall Street (compounded by lousy laws and government goofiness for over thirty years in the financial sector of the economy -- without any promise that, even now, the lessons have been learned). But as the Economist reported a few months ago, for a troubled economy, it had much less bad numbers than previous recessions.

Meanwhile, the people who are childish or simply want to exploit this for Obama's and the Democrats' gain this November in what now is a close contest (I've not yet heard anyone say this is "another Bush disaster" "like father, like son, another recession, another big financial bailout" -- there's another example of things not being as bad as they have been before!) are hyping and shrieking -- every day now we hear about things being the worst they have ever been since the Great Depression.

Plenty of us are not in trouble for reckless and greedy borrowing more than we can pay.

Plenty of us are employed, and in fact I was recruited out to Detroit metro (of all places) for a good job. (The general rule in Michigan, not just at the Big Three, has been the phenomenon of people going to other states, as they should if they must, for work.)

That being said, the unfortunate events coupled with high fuel prices (only the most dimwitted activists will still maintain our prices are "too low" such as compared to those in Europe) may affect public sentiment and I've been on record for more than a year or two as saying a Japanese-style deflationary spiral (and depression, or at least a period of gloom and several years of no or negative growth) is certainly possible. It is unlikely, but it is no more impossible here than it was in Japan (where it was fully unexpected and nobody believed it would happen then and there, either). All the deficit "stimulus" spending and grandiose projects the Japanese government chose to undertake changed _nothing_. Japan's deflationary and depression (depressing) times lasted about ten years.

Yes, it can happen here, too.

No, we don't want our taxes raised substantially, we don't want bailouts for borrowers who chose to assume too much debt, we don't want the wrong lesson learned and a much greater amount of federal intrusion into the economy, with more bailouts of the larger businesses. We don't want a massive new amount of federal spending to try to "stimulate" the economy, or simply to reward Obama voters after Obama is elected. (So long as Obama doesn't make any more grandiose vote-buying promises to various groups, he stands to gain from this bailout scandal, as do other Dems if they quickly squelch their current idiocy about extra conditions for the bailout, including vote-buying borrower bailouts.) If there is a $700 billion bailout, that means muzzling any large ambitions for health care or infrastructure spending if those in Washington are mature and responsible to any significant remaining residual extent. We don't want to see the floodgates to spending of all kinds open, which I suspect and fear.

"The sky IS falling, however it is falling on the heads of those lending institutions who have chosen greed over reason because they can"

That's where the moral hazard (and wrongfulness) of the bailout enters. The sky is not falling, despite the shriekers (who, after all, resented Sarah Palin's nation-wide introduction, beause the Dems had been set to run over McCain and the rest of the GOP this November). Not in general. It _is_ falling around the financial institutions who are seeking the bailouts (and those in Washington who want to provide them).

I _want_ to see these failing institutions (and the Big Three in Detroit, for example) see chunks of sky coming down at them. These companies have suffered from bad government policy, but have largely and primarily _themselves_ and their own bad decisions to blame. They should be allowed to fail. (Same for individuals who have chosen to make bad decisions.)

"These companies have suffered from bad government policy, but..."

But? But??

I dunno about you, but I'd really like to see some big chunks of sky falling coming down on the government, too.

In a little sidetracking related to this mess, seems the British banks buy Lehman are suffering some PR problems. As part of buying Lehman, the managers who ruined the company are getting billions in bonuses as part of the acquisition.
http://business.timesonline.co.uk/tol/business/...

Last week Barclays paid $1.75 billion to buy Lehman’s North American investment banking and capital markets business. It emerged over the weekend that Barclays had agreed to pay $2.5 billion in bonuses to Lehman bankers in the United States in a move that has angered stricken staff in London.

Barclays is understood to be vying with Nomura, as well as Standard Chartered, for Lehman’s Asian operations.