Is a Depression Possible?
No. A Depression is not possible. At least, I don't think so. But the very fact that I qualify the answer suggests how dangerous the current financial crisis is.
Too much of what is going on today resembles the 1920s, when speculation was rampant, conflicts of interest the order of the day, and borrowing to invest (on margin, in those days) was unconscionably high. Financial institutions were over-leveraged, and asset values were pushed to levels that made no sense. Commercial banks even urged savers to invest in their own stocks.
Today, we are in the same boat, if a newer version, and for many of the same reasons. The regulations adopted in the 1930s to undo and minimize the abuses of the 1920s were mostly rolled back over the course of the last generation. This was led by both Republicans and newly centrist Democrats, from Carter to Clinton. Not that all those regulations were still necessary. But many were.
When the cat was caged, the mice simply played. Or as Al Wojnilower, the septuagenarian (or perhaps now octogenarian) economist of prominence with First Boston before Credit Suisse now puts it: "As soon as lenders of other people's money are freed of constraint, they are spurred by huge short-term rewards to compete addictively with one another in taking bigger and bigger risks."
We have government regulation because time and again over at least two hundred years of history, the financial community has gone down the same road. They say they know better this time. And they don't. It reminds me of Walter Wriston, who insisted his bankers at First National City, later Citibank, knew how to assess risk. They then lent willy-nilly to Penn Central, which filed for bankruptcy in 1970. Wriston was furious because Penn Central management lied to him. Of course it did. It needed the money. Did he not really know they would? National City took the biggest lost in its history to date, begged the federal government to lend Penn Central more funds, and only got the Fed to open its lending window.
Oh, yes, here's why I think no Depression, which to define it simply is a really big, deep and long recession, in which we all will suffer a lot.
First, the government is now and has automatic stabilizers like unemployment insurance and Social Security. That spending supports consumption, providing a floor to the economy that did not exist in the 1930s.
Second, Ben Bernanke actually learned something form his academic studies of the Depression. And it was not the damaging over-simplifications of Milton Friedman's preachings about the money supply. He learned that you had to keep the credit system running. Back then, banks failed literally everyday -- thousand before it was over.
Bernanke may not know how to do this in the most efficient way -- no one does. But he is attending to it. All the bellyaching after the fact is just sour grapes, often from those who want to be bailed out. He is stepping up to the plate, consciously and aggressively.
Third, so is the Democratic Congress. It is the president who is dragging his feet. The House led the way on a $170 billion stimulus package in early December. Both the House and the Senate now have proposals to insure risky mortgages, which should be passed. The president is biding his time, mouthing clichés about being careful about market intervention. If the Republicans controlled Congress we might indeed be in greater trouble.
Still, there is plenty to do, of course. The House is talking about a second stimulus package. They should add long-term public investment in infrastructure, education and healthcare to that, as well as extended unemployment insurance and money to the suffering states.
The mortgage rescue package, yes with taxpayer money, should be passed. And speed is of the essence.
Then we should re-regulate, rapidly but intelligently, listening closely to Wall Street but not being rule by them or their securities traders.
And for now we shouldn't worry about inflation. If the economy falls, the speculation in oil and other commodities will also end. Those prices may even collapse. And there is nothing like the embedded expectations of the 1970s.
It's within our power to solve these problems. But it could go wrong. The good news is that some in Washington in positions of power now know this.
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The bailout is like an anti-depressant pharmaceutical; it makes you feel less depressed, while the underlying causes of the depression remain.
Remember that money is just a symbol for something's inherent value--and money is the universal value exchanging symbol. But how about creating a system where all flourish? We might have to barter and trade, and we might have to stop using credit cards. We might even have to take all the food that supermarkets throw away and redistribute it to people who can't afford it--because in the future, no matter if you are a capitolist or a socialist, it will be absolutely immoral for anyone to go without food, water, shelter, and the right to necessary healthcare. We look back a hundred years and think, "my god, did that actually happen?" I mean, the Jim Crow laws were actually LAWS, legislated into place and then enforced by the police--we're not talking about a prevailing mindset necessarily, but actual laws. Someday, 2008 will seem like the year when finally our economy either shifted or ended. It's too imbalanced; it's not sustainable, as we are seeing.
Mr Bernanke, I am in the Real Estate industry. Send one of those bailouts my way. I need a capital infusion.
So you think a depression isn't possible because of unemployment insurance and social security??? Then by that reasoning, it should be easier to prevent a recession. If I remember correctly, the "great depression" occured after the creation of the federal reserve. Which allowed the country as a whole to inccur debt levels that weren't sustainable, because of the federal reserves ability to create money out of thin air. What we're witnessing now is much worse. After the roaring nineties,( like the roaring twenties) we should've fallen into at least a severe recession ,if not a depression. Instead, our illustrious fed reserve decided to inflate another and even larger asset bubble,(housing), which delayed the coming depression, but won't prevent it. And in the process, making it much worse. I know it's not popular to talk about the possibility of an economic depression, but it's time to have some straight talk about the economic realities we're facing now.
"the government is now and has automatic stabilizers like unemployment insurance"
More Debt.
"He learned that you had to keep the credit system running"
More Debt.
"The House led the way on a $170 billion stimulus package in early December."
More Debt.
"Both the House and the Senate now have proposals to insure risky mortgages,"
More Debt.
"The House is talking about a second stimulus package."
More Debt.
"add long-term public investment in infrastructure,"
More Debt.
"education and healthcare to that"
More Debt.
"as well as extended unemployment insurance"
More Debt.
"and money to the suffering states."
Debt, debt, debt, debt, debt, debt, debt, debt, debt.
Excuse me for bringing up the obvious, but isn't debt the reason we're having all of the problems that we are seeing now? You are perhaps suggesting that the cure for typhoid is cholera? How will insuring that the $600,000 mortgage on that $150,000 house is bailed out going to solve the underlying problem of borrowing against overpriced tulips and spending the money on imported plasma televisions? The Federal Government is on tap for a REAL deficit this year of $800,000,000,000. That's without the $230,000,000,000 bailout of Wall Street. That's over ONE TRILLION DOLLARS in fiscal stimulus on top of the Fed standing on the monetary gas pedal. Why don't we try economic sanity for a change or did that die with the advent of Reaganomics?
Depression, short term probably not, in the next 10 years, good possibility. The National Debt is not even mentioned anymore, budget yes, debt forgotten. Our debt is owned by foriegn countries, China, Japan, and Heaven forbid, Mexico, if the inteset rates drop to low they will start to bail. According to some pretty knowledgable people, at the current rate of spending and taxation, in 10 years the government will only be able to pay for Social Security and the interest on the debt, nothing else.
The debt now stands at $455,000.0
Let me see the war is costly and we only know about a tiny bit of it, much of the spending is off the books. The rich were given another big tax gift a.k.a. trickle down money. The real estate market has been pushed to make up for job losses by keeping interest rates artificially low and pushing mortgages to anyone who would take one telling them to profit on the "flip". The hedge fund managers, the most in history, have made bad bets on the overheated real estate market. China and other countries have pushed cheap goods on us so we wouldn't notice how a stretched low dollar doesn't buy much in the world. Once again we were all told the fun would never end as long as we kept buying houses and the stuff to go in them, and finally OPEC is tightening down the screws again on the oil supply. What part of Voo Doo economics don't we understand yet?
Even if we don't get a depression, we could get runaway inflation. But for the time being, Americans pay less for their gasoline than do the residents of any other industrialized country. So enjoy your SUV or your motor home. You may not be able to afford to drive it much longer. Former President Carter for the most part failed in his efforts to get Americans to go on an energy diet. If you think $3.50 gas is expensive, what will you do when it goes to $8 a gallon (which is what the Brits now pay I think).
You are correct in that with everything foreseen we will not be in a depression, but when do we foresee all of the events that may happen in the future?
The problem with our economy is that it is 70% based on service. If anything happens that shakes Americans from buying, the domino effect will be greater than what is going on in the financial sector right now and there would be little that the fed's could do to stop it. The government knows this, that was why Americans were encouraged to shop after 911.
When we had a manufacturing base, when we had much more exports, we did not have this doomsday potential scenario we have right now.
I think economists should be incredibly alarmed about how much of our economy depends on people in this country continuously buying stuff. What percentage of our employment sector could be wiped out if this feedback loop gets interrupted?
What is the difference between a recession and a depression ?
wiki -A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression.
By this measure some populations have been in a depression, the poor and working class. And that is the problem with measuring the economy with GDP. When all gains are in the top 20% , more specifically the top 1% then GDP means nothing for the real economy as most of these gains are financial and not shared by the real economy at least not the lower 60%.
"By this measure some populations have been in a depression, the poor and working class. And that is the problem with measuring the economy with GDP. When all gains are in the top 20% , more specifically the top 1% then GDP means nothing for the real economy as most of these gains are financial and not shared by the real economy at least not the lower 60%."
YES! Hear hear mmckinl.
Depression for whom? Multinational corporations who have bled us dry, stole our jobs and then turn around and wonder why we can afford their cheap shit?
It's a Depression we've already entered, and the bigger they are, the harder they will fall and we'll ALL be better off for it. That's because we'll have the tool to replace the huge, unmanageable beats with small, local businesses again. Everything local will prosper. Everything national will suffer.
Well, I'm planning on it.
There's this old advertisement: "We make money the old-fashioned way...we earn it". I think this put out by Solomon Smith Barney trying to evoke confidence by pissing on Drexel et al (the LBO groups).
There is quite a lot to this about current America. Fee income based volume has become the hallmark of banking. Computers permit consolidation and the speed of money transfers make "float" a dying breed. Late charges for credit cards are king.
But think of this: When the market makers (hedge fundies and their affiliates in mutual funds) sell short in a calculated move to bring a stock price lower, then they cover their shorts, to watch the price recoup, indeed their cover brings the price up. This kind of chicken-shit abuse takes place by the big boys, the ones with the big bonus', and the republicans are in awe of their way of "earning" such big sums. Yet none of it is really earned. It is in real terms like picking the pockets of the public. Republicans are such shallow stooges they have no awareness of this. Can little George really be as stupid as he seems? The house rules for "fixed" gambling should stay in Las Vegas. They are now, however, in Wall Street, where the house always wins. It is an apt comparison.
Right on, Henry!
Jeff,
The root-cause of our economic malaise isn't the usual FED related supply of money. Bernanke has flooded the financial market with cheap, easy money. But banks with poor asset and loan portfolios aren't in the same mood to extend easy credit terms to consumers. Why "throw good money after bad"? This is especially true when you consider tapped out consumers with stagnate incomes facing FED generated rising costs in the energy and food sectors. Additionally, many of these same consumers are experiencing declining home values. Disposable income is gone. It's all about survival income.
There has been a major transference of wealth without remuneration to those whose value-added labor/production actually created it in the first place. Furthermore, the ability to create REAL wealth has been displaced from our economic means. We have simply been redistributing wealth with increased disparity and concentration in the hands of the few.
Our economic means of production have been removed, consumer incomes displaced, and the supply of money restricted. A stimulus package that will simply payoff short-term debt or be redistributed to China and WS will not resurrect this barter based economy. Repairing and replacing our infrastructure will only further devalue the dollar and increase record government debt.
In order to save our economy the means of production and ability to generate REAL wealth must first be restored. That is something the FED is absolutely powerless in providing. This situation is beyond the means of the FED as well as the Keynesians. It's much more basic: Smith and Ricardo: "Means of Production" and "Comparitive Advantage".
Hey, come on, GOP(if I may).
Don't make all of us read two economic textbooks to get the gist of your solution to the failing US economy.
Give us a thumbnail sketch.
I completely agree about the cheap money being wrong.
It is NOTHING except more debt to be repaid.
Because this is how we create money.
Providing $170 Billion to pay off some credit card debts is done by committing us to the repayment of some $350 to $400 Billion, counting the interest.
And you must be partly right if we use debt-money to rebuild the infrastructure.
And you are definitely right that the middle-class has been denied their advancement as the uber-rich have gotten uber-richer.
Mega-recession, or Depression. whatever.
We need to start looking at climbing back up that hill that needs to be climbed if our grandchildren are not to repeat this debacle. That's our job.
We've got this internet thing.
And free speech.
So, give us a clue.
Please.
Joebhed,
Hi Joe. Thanks for taking the time to reply. GOP is fine but, if you prefer, my Huffpost buddy "Rule of Law" has better defined the acronym as "Groping Old Perverts". Your choice.
I like Mr. Madrick's posts and respect his knowledge, experience, and opinions. I was attempting to make a point that relied too much on economic terms. I was planning on clarifying my point to you when I noticed "Rule of Law"'s reply. In a nutshell, RL nailed it. So please see above response from "Rule of Law".
GOP
Greedy, you're talking about rebuilding our industrial infrastructure, right? Creating real jobs? Creating real wealth? Re-creating the vanishing American Middle Class? Reinvesting working Americans in their own country, giving them the pride and dignity that that Corporate Pimp has stolen?
You just moved to the top of the list, my friend! You can speculate about Bush bringing down the twin towers, but when you start to mess with this Doomsday Economy, you put yourself in the same crosshairs Kennedy did when he printed silver certificates! But, as usual, you are spot on. The godammed un-Federal Reserve has no power to create substance--only ephemeral notions like money from thin air.
RL,
As always, spot on my friend. You nailed the concept of "Means of Production" and "Value Added Production". I especially enjoyed your Federal Reserve comment. The only thing I might add is that when I use the term "Comparative Advantage" I am referring to a mutually beneficial system of trade for nations as opposed to "Absolute Advantage" and "Labor Arbitrage" that is best illustrated by our MFN (Most Favored Nation) trade status and system with China.
FED = Financial Economic Dilution?
Here's the deal. Give me all the money and I'll spend it like a drunken sailor, thus saving the economy. How can I make this promise? Because I once actually was a drunken sailor and I sure don't have a dime to my name today, so it must work exactly as I've outlined here.
It's either that or give all the money to Wall Street bankers and hope they spend it like drunken sailors. I'm betting not a one of them has the real-world experience I have, so going with them is strictly a roll of the dice. Former real drunken sailors are a sure thing.
LOT MORE GUNS OUT THERE NOW THAN DURING THE 1929 DEPRESSION.
So many people would not even have to ability to raise vegetables or perserve them for the winter so I feel sorry for the majority of the spoon fed Americans.
Hmm. Very very good point. Since poverty=violence, what will happen? There's a HuffPo blog waiting to be written.
Well, if you head down to Larrybob's home and garden NOW, and get some seeds and stuff, about the time they're whining and sniveling about food imports, you can walk out in your back yard and disconnect a big giant juicy tomato and enjoy it while the morons on CNN are tearing their hear out and having an on-air apoplectic fit. Then you can save energy by shutting off the idiot box, and go enjoy some ice-cold homemade lemonade..
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