• If you are having problems logging in please use the Contact Us in the lower right hand corner of the forum page for assistance.

About that 2nd Depression

Texan

Well-known member
About that 2nd Depression

April 22, 2008

The U.S. economy has, for many weeks, had Americans (and their politicians) talking recession: The economy grew only marginally, 0.6 percent, in the fourth quarter of 2007—and may have dipped into negative territory in the first quarter of 2008.

Or the chatter might be a false alarm. We were struck over the weekend by a punchy post from economic forecaster Donald Luskin on SmartMoney.com: "Economic Recovery Already Underway." His thesis: "What a difference a month makes! . . . Compared to the bleak expectations then, even just hanging in there would have been an upside surprise. But it's more than that. Things actually are getting better."

The wealth of up-tilting data Luskin cites won't silence the gloomiest Jeremiahs. But it plays havoc with their recent fun: predicting a second Great Depression. So before our economy emerges from its torpor (or whatever it does next), this is a useful time to explore what happened in the Depression—and what it taught us about handling a devastating economic collapse.

In the depth of the Depression, 1933, the jobless rate was 25 percent (roughly five times today's). Economic output had shrunk more than 30 percent. Trade shriveled. Nearly 11,000 banks failed—43 percent of all U.S. banks. Bread lines lengthened. Desperate, dispossessed people searching for work roamed the nation on foot, in rattle-trap Model T's, and by hitching rides on the rails.

The Depression was a decadelong series of calamities. It began with the stock market crash of 1929, which, almost overnight, wiped out 40 percent of the value of stocks. Each time the economy seemed to gain traction, well-intentioned but wrongheaded government policies sank it anew:

Congress passed the 1930 Smoot-Hawley Tariff Act to blunt competition from low-priced imports. But retaliatory actions overseas closed foreign markets for U.S. exports, primarily farm goods. Prices plummeted. President Herbert Hoover urged businesses to keep wages high to protect workers' purchasing power. Many complied. That led to the odd specter of sharply higher wage rates in 1930 and 1931—but many fewer jobs.

Why so? Had wages dropped along with prices, employers might have kept more workers. Washington raised taxes in 1932, leaving those who still had jobs with a greater burden. Even as bank panics grew epidemic, the Federal Reserve allowed the nation's money supply to shrink by more than 30 percent between 1929 and 1933.

President Franklin D. Roosevelt's first attempts to jump-start recovery—the Agricultural Adjustment Act and the National Recovery Administration—were aimed at eliminating competition and reducing production. As late as 1937, the government pursued policies to increase the cost of labor and shrink the money supply.

Social Security, jobless benefits and bank deposit insurance are all legacies of the Depression that today serve to blunt the hard edges of downturns. So is a much larger role for government regulation and intervention. The upshot?

Today's Fed chairman, Ben Bernanke, is a student of the Great Depression. His creative approach to this year's crisis is the mirror opposite of what the central bank did in the 1930s. Bernanke's Fed has lowered interest rates, flooded markets with liquidity and prevented an investment bank failure that could have cascaded into public panic—and more failures. Many economists think that, as a result, we've traded a potential crisis for a long stretch of slow growth.

Since World War II, the U.S. has endured 10 recessions—unofficially defined as at least six months of declining economic output. They lasted an average of 10 months, during which unemployment rose by some 2 or 3 percentage points and economic output dropped by about 2 percentage points.

So if the TV talking heads who spent the winter warning of a second Great Depression scared you into a bunker, it may be safe to step out in the sunshine. We'll need more bad news and some serious policy mistakes to make this downturn a replay of the '30s.

Copyright © 2008, Chicago Tribune


http://www.chicagotribune.com/news/opinion/chi-0422edit1apr22,0,1240543.story
 

Mike

Well-known member
I was listening to some guys on CNBC this morning saying this downturn will go by as soon as the banks get their business in order.

They were saying this recession is lighter than the one handed off to Bush.


"Chicken Little" = OT, won't be wanting to hear it though.
 

backhoeboogie

Well-known member
Consumer prices drop during a recession. I don't see receding prices on anything - yet. Everything still seems to be going up and up. Let me know when the bottom falls out so that I can buy up some things I'd like to have.

Edit: I have no desire to buy a 1 acre spread in the city with a POS house on it. Even with the current prices, they are way over priced. Those little half acre lots still sell for over $50K.
 
A

Anonymous

Guest
Mike said:
I was listening to some guys on CNBC this morning saying this downturn will go by as soon as the banks get their business in order.

They were saying this recession is lighter than the one handed off to Bush.


"Chicken Little" = OT, won't be wanting to hear it though.

But so far the facts aren't backing up the article...Too bad you're Bushamania cheerleading to the wrong person-- doesn't seem like the investors or the rest of the world have your faith....DOW dropped another 105 points today...

Dollar Falls to New Record Low vs. Euro

MoneyNews
Tuesday, April 22, 2008


FRANKFURT, Germany -- The euro roared to another record high Tuesday, briefly crossing $1.60 in late afternoon trading in Europe after a pair of European Central Bank governors said high inflation may cause the bank to raise interest rates.

Oil Nears $120, Gas Rises Above $3.50

MoneyNews
Wednesday, April 23, 2008


NEW YORK -- Gas and oil prices pushed further into record high territory Tuesday, with retail gas reaching a national average of $3.51 for the first time and crude nearing $120 as the dollar fell to a new low against the euro.

At the pump, the national average price of a gallon of regular gas rose 0.8 cent Tuesday to $3.511, according to a survey of stations by AAA and the Oil Price Information Service. Prices for diesel — used to transport most food, industrial and commercial goods — also rose overnight to a new record of $4.204 a gallon.

Gas prices are nearly 66 cents higher than last year, when they peaked at a then-record of $3.23 in late May, and have prompted many analysts to raise their estimates of where gas is going to go.

Reprinted from MoneyNews.com
Shiller: Housing Collapse Worse than Depresssion


Tuesday, April 22, 2008 2:28 p.m. EDT


An influential economist who long predicted the housing market bubble cautioned Tuesday that the slump in the U.S. housing market could cause prices to fall more than they did in the Great Depression and bailouts will be needed so millions don't lose their homes.

Yale University economist Robert Shiller, pioneer of the widely watched Standard & Poor's/Case-Shiller home price index, said there's a good chance housing prices will fall further than the 30 percent drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15 percent since their peak in 2006, he said.

"I think there is a scenario that they could be down substantially more," Shiller said during a speech at the New Haven Lawn Club.
 

Texan

Well-known member
Economic Recovery Already Underway
By Donald Luskin |Donald Luskin Archive |Published: April 18, 2008

WHAT A DIFFERENCE a month makes!

Just a month ago yesterday, markets opened to the news that the firm Bear Stearns (BSC) had been vaporized — and for no better reason than that investors had arbitrarily lost confidence in the venerable brokerage firm and all withdrawn their money from it at the same time. It was only the Federal Reserve stepping in with $30 billion in risk capital that prevented the Bear collapse from taking down world capital markets.

Everyone was already saying that the U.S. economy had fallen into recession. The Bear catastrophe could only make matters far worse.

And yet now, a month later, the economy has not gotten worse. Compared to the bleak expectations then, even just hanging in there would have been an upside surprise. But it's more than that. Things actually are getting better.

Consider the key earnings reports coming out this earnings season. General Electric's (GE) miss was a shocker. But should it have been? Everyone knows its results are dominated by its capital markets subsidiary, so why the surprise when it — like every other bank and broker — took a big hit? The only true surprise was that GE's management let it be a surprise — they should have warned.

Other than that, the news has been terrific. Look at what's come out of the technology sector the last couple days. Intel (INTC), IBM (IBM) and Google (GOOG) all surprised big time on the upside. No falloff in world-wide technology demand at Intel and IBM. And no falloff in the consumer sector for Google.

How about this week's macroeconomic statistics? The Philadelphia Fed's survey of regional manufacturing activity reported lower yesterday. But the day before, the New York Fed's comparable survey defied bearish expectations and came in with a neutral reading.

Industrial production was reported as rising 0.3% last month, when it was expected to have declined. That's a key recession indicator — and it's just not indicating. The high-tech component of industrial production has been especially strong, currently at all-time highs.

And then there are the markets themselves. Since the panic bottom a month ago yesterday, the S&P 500 has returned 7.1%. The best-performing sectors have been financials, energy and materials, indicating that the credit crisis is mending and that fundamental forces of growth are strong.

The credit crisis is indeed mending. If you invested in safety-first Treasury bonds a month ago, you've lost 2.9%. But if you bought risky high-yield corporate bonds — also known disparagingly as "junk bonds" — you'd be up 3.8%. If you were really daring, and bought the supposedly toxic waste that's been at the heart of the credit crisis — collateralized debt obligations (CDOs) based on subprime mortgages — you'd have done even better, making 6.7%.

The bears hang onto every little scrap of evidence coming out of the financial and housing sectors to bolster their case that we're already in a recession and headed for a depression. Doesn't any of this good news count for anything?

The worst is over. It's more than over. Consider what's happened in the banking sector. With Merrill Lynch's big write-off yesterday, and Citigroup's (C) this morning, cumulative bank and broker losses from subprime lending and related credit craziness has come to something like $250 billion. That's quite a trick. According to data reported by the New York Fed, the value of all the subprime and Alt-A mortgages currently in default is only $116 billion. What's likely happened here is that the banks have taken mark-to-market losses on securities that anticipate much higher foreclosure rates which haven't happened yet, and may in fact never happen.

And don't tell me it's all because the markets expect the Federal Reserve to lower interest rates to zero and keep them there forever, propping up the economy. That's what markets were expecting a month ago, but not now.

We know precisely what markets are expecting the Fed to do, because we can observe the prices of futures contracts on the Fed funds rate. A month ago, roughly speaking, those futures were priced to expect the Fed to lower interest rates another 75 basis points, to 1.5%, at the FOMC meeting at the end of April — and leave them there for at least a year. Today those same futures are expecting only a 25-basis-point cut at the April FOMC. A year from now, they're expecting that last cut to have been taken back — and another 25-basis-point rate hike added on for good measure.

When general sentiment is as bad as it is now, the good news kind of sneaks up on you. When it pops out, you tend to ignore it. You get used to the constant drum-beat of doom and gloom. But that's a huge mistake.

The worst version of it is the kind of economic defeatism that seems to be permeating the primary election campaigns for the presidency. All the candidates are trying to outdo each other in painting a horrible picture of the economy — probably to scare you into voting for them, so they can supposedly fix it.

They'd like you to believe that America has no economic future, that our best years are behind us, that we've run out of tricks. But it's not true. And Google's big earnings report yesterday proves it.

Look at the billions of dollars being earned by a company that didn't even exist 10 years ago. I see that money tangibly because I live in Silicon Valley, where Google is headquartered. To me, it's not just an earnings report. It's thousands of high-paying jobs. It's dozens of new buildings being erected all over the landscape here, to house their headlong growth.

There's no real estate crisis here in Silicon Valley. We're not depending on subprime mortgages for our homes. We're dependent on jobs, and salaries, and bonuses and stock options from companies like Google. In other words, we're betting on good old-fashioned hard work, innovation and growth.

So what if there was some excess home building and home buying? So what if some stupid banks made some stupid loans, and some stupid home buyers took those stupid loans and now can't pay them back? It's a problem, I suppose. But in the end it's a side show. The economy marches on.

And the stock market is going to keep marching right along with it.


Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at [email protected]


http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20080418-economic-recovery
 

Texan

Well-known member
The Sky's Not Falling

By John Stossel
April 23, 2008

"Mortgage Crisis," shouts the New York Times. The Times has used the term "subprime crisis" at least 11 times. Not in opinion columns -- in news stories.

The columns are worse. Paul Krugman writes: "A lot of the financial system looks like it's going to shrivel up and have to be rebuilt."

The "financial crisis," says Fortune's senior editor, "is threatening to bring down the entire system, with dire consequences."

When the current troubles aren't a "crisis," they're a "disaster". That's what John McCain called them, while Hillary Clinton prefers "crisis," saying, "This market is clearly broken, and, if we don't fix it, it could threaten our entire housing market."

Wait a second.

Where is this "credit crisis"? Did the supermarket reject your Visa card? I still see Ditech commercials offering fixed-rate mortgages at around 5.5 percent.

Sure, some lenders are skittish while things play out. Some investment banks and brokerage houses are sitting on shaky mortgage-backed securities. But why call that a "crisis"?

Do we have 25 percent unemployment, as we did during the Depression? Do we even have 7.5 percent unemployment, 12 percent inflation and 20 percent interest rates, as we did during Jimmy Carter's presidency?

There's a been a loss of jobs in the past two months, but that comes after years of strong job creation -- 25 million net jobs in the last 15 years . At 5.1 percent, unemployment is low by historical standards.

And are we really experiencing a mortgage-default "crisis"? No. The Mortgage Bankers Association's 2007 fourth-quarter survey reports that foreclosures came to 2.04 percent of all mortgages. Many of those were speculators seeking flip profits rather than homeowners losing a dream house. During the quarter, only 0.83 percent of homes entered the foreclosure process. It may get worse -- in March, "foreclosure filings, default notices, auction sale notices and bank repossessions rose 5 percent," Reuters reports. But let's keep things in perspective: Ninety-eight percent of borrowers are not in foreclosure. Only a small percentage of them are even late in payments.

Politicians love a "crisis." John McCain, Hillary Clinton and Barack Obama all think that the government should bail out homeowners who can't pay their mortgages. When they say the government should do this, they mean the taxpayers, including those who are paying their mortgages. They also think the government should regulate the lending and investment industries further.

Why?

Because "crisis" justifies making big government bigger.

It's why we now have a global warming "crisis" and in previous years we had "crises" over avian flu, the Y2K threat to computers, imaginary cancer spikes caused by pesticides, killer bees flying up from Mexico, and uncontrolled population growth leading to a "Population Bomb" that will bring "riots and mass starvation" by the year 2000.

This is not to say that lots of homebuyers aren't having a hard time. But the rapid rise and fall in housing values in some parts of the country -- and the rippling consequences at each stage -- do not justify scrapping what we know about economic success and turning to government control. Prosperity and stability come from people being free to innovate and produce -- and yes, fail. Bureaucrats, however well-intentioned, cannot know enough to manage that process. They are unqualified to give the green light to some innovations and the red light to others. Bailouts create irresponsibility.

I expect the silly people to say silly things. Here's Paul Krugman: "t's puzzling that Democrats haven't been more aggressive about making the disaster an issue for the 2008 election. They should be."

Keith Olbermann even seems to find the "crisis" exciting. "You watch, this is going to make Enron look like the failure of a lemonade stand."

But the rest of us should get a grip. The best regulator of economic activity and source of knowledge is free competition.

Of course, government inhibits that in many ways. If we want to avoid disruptions like the current one, let's undertake a wholesale examination of government intervention in the economy. Freedom, not control, is the ticket to success.

Copyright 2008, Creators Syndicate Inc.



http://www.realclearpolitics.com/articles/2008/04/the_skys_not_falling.html
 

Latest posts

Top