THE WAY OUT OF THE NEXT GREAT DEPRESSION

All things must come to an end.

So it is that the housing bubble had to burst.  And now….?  Well, how did the stock market react today?

Stocks plunged Monday, with the Dow down as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.

But the Dow Jones industrial average (INDU) and other major indexes cut losses in the final hour. The Dow ended down just short of 370 points.

The index fell to 9,525.32, the index hit its lowest level during a session since Oct. 24, 2003, when it touched 9,497.72.  (from here)

With the passage of the Wall Street Bailout Bill, is our economic crisis over?  It would seem that it is not.  I suspect there are several reasons for that.

  • From the perspective of most people, this economic crisis came out of nowhere.  There were experts who spoke up, but almost no one paid any attention.  Although the news media constantly plagued us with nonsense about the state of the economy, the press almost never mentioned the full implications of an exploding sub prime lending market.  The deficit was an issue, but the implications of so many potentially bad house loans never seemed to register.   Did we refuse to listen, or did our media “experts” just turn out to be puffed up talking heads?
  • Our government has responded to the crisis by assuming even more power over and responsibility for the economy.  In the process, our politicians have ignored the Constitution.  When men govern according to the Law, a society can be relatively stable and prosperous.  When men govern according to their whims, a society is inherently unstable.  Only the elite prosper.
  • We have a consumer driven economy.  With each generation since the Great Depression, we have become more impatient and spoiled.  Instead of saving and investing for the future, we insist upon instant gratification.  This impatience to consume in fact constitutes the basic reason for our economic crisis.  Instead of waiting until we could put down a reasonable deposit, we consumers insisted upon easy loan conditions.   To pacify our impatience, our politicians pretended to give us what we wanted.  In reality, housing developers made a killing selling increasingly expensive homes.

So investors are queasy and wondering what’s next.  To assure profits, businessmen want a stable business environment, but where is this stability businessmen crave?  When government assumes a large role in the conduct of business, the business environment inevitably becomes unstable.  Government must regulate business.  When it becomes a player, government has a conflict of interest.  So it fails in its primary task.  Instead of providing a level playing field, government protects it own interests.

Worse, as government becomes an increasingly major player in business and the economy, politicians become more susceptible to bribes and playing favorites.   When they are not inhibited by the restraint of Constitutional limits, the decisions of politicians can become almost whimsical.   So it is that we have seen several decades of increasing government tinkering with the economy.  So it is we have seen decision after decision driven by politics instead of economic needs.  So it is that our government has “given” us freeways, low interest loans, free or inexpensive schools, subsidized mass transit, food stamps, housing vouchers, expanded Social Security and Medicare, drug benefits…   So it is that we have steadily socialized a greater proportion of our economy.  And we have done this without serious debate or the required amendments to the basic Law of our land.

This behavior is nothing new.  Consider the factors that conspired to create the conditions that allowed the Great Depression to make a mess of America’s economy .

  • During the 1920s, corporate, bank, and individual participation and speculation in the stock markets was very high. Investors, including banks, could buy stocks on margin, paying only a small percentage (for example, 10%) of the stock’s street value. This allowed for a tremendous amount of leveraging and exposure in equity assets with only a moderate cash outlay. In addition, banks could use customer deposits to buy stocks, further driving up share prices and increasing the potential fall in prices. And prices did fall. From October 1929 to the early 1930s, many stock prices lost over 90% of their value. For many Americans, their savings and wealth evaporated almost overnight.
  • As a result of the business downturn, demand for goods and services plummeted, U.S. corporations responded by lobbying Congress for increased protection from the import of foreign-made goods. Congress complied. Led by Congressmen Smoot and Hawley, tariffs averaging 60% were placed on imported goods. Since a tariff acts as a tax, this led to a corresponding increase in the price of these goods to the American consumer. Foreign countries immediately reciprocated, shutting off markets for U.S. exports. Global trade contracted, leading to a further deterioration of the economy.
  • With the economic downturn, incomes and tax payments declined. Believing a balanced budget was of primary importance, President Hoover raised income and corporate taxes, further decreasing disposable incomes and jobs.

(from here)

We essentially have already met the first condition.   Lenders extended too much credit.  If we elect Democrats in the coming election, we cannot count on getting lenders under control.  Democrats encouraged the easy lending that created the problem in the first place.  Because Democrats want to protect domestic labor unions, we will also most likely meet the second condition.  However,  Democrats will probably not create the third condition.  Instead of trying to balance the budget, the Democrats are more likely to continue their spendthrift ways.  In that case, we will not see a decrease in disposable income.  What we might see is the economic chaos Germany once saw, runaway inflation (see here).

Base upon historical precedent, the only practical solutions to our economic woes is to put lending back in private hands, promote free trade, and to cut government spending.  These are policies that John McCain, Jim Gilmore, and Keith Fimian are more likely to support.  We most certainly cannot count on their opponents to do the right thing.  So please vote wisely.

When we shirk our responsibilities, there is no escape.  Sooner or latter, there is always a price to be paid.  We can only pray that God will grant our people the wisdom to see our dereliction of duty sooner rather than latter.  We must start voting for leaders who refuse to “give” us things.  We must vote for leaders who expect us to participate and share the burden.  We must each help in the conduct of our society and accept responsibility for running our own lives.   If we want politicians we can trust — who cannot be bought — we each must stop selling our vote to the highest bidder.

250px-bundesarchiv_bild_102-00104_inflation_tapezieren_mit_geldscheinenGermany, 1923: banknotes had lost so much value that they were used as wallpaper.  See hyperinflation.

6 thoughts on “THE WAY OUT OF THE NEXT GREAT DEPRESSION

  1. There are more people than ever. There is a greater demand for goods and services than ever. We have a greater diversity of means for producing new and innovative products and services than at any time in recorded history.

    As FDR said, “The only thing we have to fear is fear itself.”

    This market correction will eventually pass, just as all others have. The bailout bill may cause some of the problems to last longer than they would have, but we will likely have less deep of a correction because of the bailout.

    I plan to shop more locally so that locally owned businesses may be supported. If I must shop at the chain stores, I will look for and buy American goods, first. If I can’t find a, Made in the USA, product, I will buy an import from a free market, non-Communist country.

    Just an aside, buying lunch at a locally owned restaurant, like Virginia Barbecue, helps keep our local economy healthy and provides jobs for your neighbors. The cost of the meal is generally lower than at the big franchise places, too.

    Sure, we will have a time while money is short for most of us, but let’s get out and support our locally owned businesses to the extent to which we can afford. We will pull through this together and with a change of leadership in the November election, we should be on the road to prosperity again, soon.

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  2. Re: “Instead of trying to balance the budget, the Democrats are more likely to continue their spendthrift ways.”

    Eh? Bush tried to balance the budget? It was in surplus when he came to office. He pushed for sharp tax cuts. The deficit increased and increased. The USA became the world’s largest debtor nation, with China taking a large hunk of our debt. From time to time Bush would say that he had plans to cut the deficit in half by 2009, but half a deficit is still a deficit – and in any case the 50% reduction hasn’t occurred.

    And now, of course, there is the bailout, which will add even more to the deficit. You can’t blame it all on the Democrats. Congressional Democrats added a lot of pork to what Bush asked for, but he asked for $700 billion, and the Democrats cut that that $350 billion (and the rest to be approved later by congress) before adding other tax cuts and pork on top.

    Now, the odd thing about deficits is that they are good things, in deflationary times. And they can be insignificant in normal times, if they are only a few percent of GDP, but when you have a deficit in good times and then you go into a recession, then you are carrying a huge deficit, the deficit of the good times plus the deficit of the bad times. Bush was responsible for the deficit of the good times. Most likely the Democrats will have to add to it in the bad times.

    But, let’s be frank, wouldn’t McCain be just the same? He’s calling for continuing the Bush tax cuts, and hopes to shrink the deficit by decreasing the size of government. The latter is laughable.

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  3. J. Tyler Ballance – I appreciate your positive attitude, nonetheless, we have more to do than buying from our neighbors. We risk further encroachment by the Feds on the lending industry. When I refer to our leaders as our Glorious Leaders, it is no joke.

    smrstrauss – Let’s follow your logic. Since Clinton balanced the budget using the so-called defense dividend, would it not be more accurate to say than Ronald Reagan balanced the budget?

    In truth, Congress, not the president, balances the budget. The president has a role, but Congress is the major power. When Clinton was president, which party controlled Congress?

    The greatest power is the electorate. If any body is responsible for what government does, it is us. Hence “We must each help in the conduct of our society and accept responsibility for running our own lives. If we want politicians we can trust — who cannot be bought — we each must stop selling our vote to the highest bidder.”

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  4. Agree that we have a national/international problem.

    Economics, like politics, is local. We may not be able to control the world’s usury conspirators, but we can help keep our “Mom and Pop” businesses afloat, especially in tough times.

    Things will likely begin to improve under a Democratic administration. While I do not look forward to “The Obama” as our President, he can surely do no worse than “W” and his gang of crooks.

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  5. J. Tyler Ballance — ““W” and his gang of crooks”? While I would hardly call “W” my favorite president, I see relatively reason to call him a crook. The Wall Street Bailout Bill was crooked and unconstitutional, but it is “legal”. If the Democrats had any evidence of illegal malfeasance, they would most certainly use it.

    What I am concerned about is policy. We have public policies that are crooked. These are socialist policies, and the Democratic Party is the party that most advocates socialism. Obama certainly advocates socialism. Is that what you want?

    Like

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