Nov

25

 I agree with Vic that level of market probably (more than) reflects future difficulties in the economy.  But in case this not so, I have been unable to find good articles or explanations of worst-case scenarios, i.e.:

1. What would happen on the downside if credit crunch/market seize-up continues?

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all the changes built up since 1930s?

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars –not so much how it is repaid, which it never will be, but what gets gets closed out when resources are diverted in this way?

4. Also, downside of uncertainty of continued government measures, and of delaying or not letting markets clear, of keeping bankrupt companies in business, keeping housing and other asset prices from falling to a level that would cause money on the sidelines to come rushing in?

I have not seen good articles or opinions of smart economists or financial writers on the above — can anyone point me to some of these?  Or can any readers who have thought about give a quick opinion?

Kevin Depew responds:

1. what would happen on the downside if credit crunch/market seize-up continues?

If the market were allowed to fail, there would be great devastation as many bankers and their friends, including the captains of the so-called "good industries," would go out of business. Then, chaos would ensue as enterpreneurial-minded men and women create untold ways to save and then re-direct capital to all manner of business ventures we can scarcely even imagine.

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all changes built up since 1930s?

"We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents…But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics." - Murray Rothbard (1969), "Economic Depressions: Their Cause and Cure"

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars (not so much how it is repaid, which it never will be, but what gets gets closed out when resources diverted in this way)?

"[T]he government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing." - Murray Rothbard, "Economic Depressions: Their Cause and Cure"

Rothbard wrote this stunning essay in 1969. Today, a mere 39-40 years later, we have succesfully ignored every paragraph, contravened every prescriptive statement and chosen the diametric opposite of every word he wrote.

Nigel Davies writes:

Chess players use the term 'unclear' for such situations, there's no precedent so who knows. So good articles will, by definition, be a contradiction in terms as there's no way to establish an opinion based on any kind of historical precedent. The case of Japan may be very misleading because they experienced a deep recession whilst doing business with a world which was booming (or at least bathing in temporary liquidity).

Of course things may be more understandable when one adjusts one's time scale. When, for example, did we last have three closes up?

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Laurel Kenner writes:

Mark Pittman, whom I'm glad to have helped hire at Bloomberg some 10 years ago, reported yesterday that the U.S. government has pledged $7.7 trillion to ease the credit crisis. The total U.S. debt just topped $10 trillion, and does not include most of the new pledges. Mr. Pittman has been way out in front of his media peers on this story.

My other favorite source is Amity Shlaes, a scholar who writes excellent columns for Bloomberg. This year, she published The Forgotten Man: A New History of the Great Depression, and it is quite illuminating as to how the New Deal affected the economy.


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5 Comments so far

  1. the boy on November 25, 2008 1:22 pm

    They cannot let the entire system just break. The government will print money, the dollar will drop a lot, and real assets will skyrocket. And this will not happen tomorrow, but over a period of years.

  2. Howard Bernstein on November 25, 2008 4:28 pm

    I suggest you read Conquer the Crash (2002) by Robert Prechter and visit his firm's website. He has been spot on the current crisis and its implications, although admittedly he predicted this to happen years ago. His Elliott Wave Theorist is a must read for me every month.

  3. reid wientge on November 25, 2008 6:31 pm

    Any devastation will be prolonged and amplified by government intervention. However, with no principled political opposition in place we must rely on O's selfish desire to keep the economy healthy long enough to mail a "French Letter" of socialism to the American people. How to return the "Letter" is the question.

  4. Adam on November 25, 2008 10:08 pm

    There used to be a list of recommended websites here that included marginal revolution it has had some interesting commentary most recently on the Citi deal (universally panned). Alltop.com also has a useful economics section.

    Something I noticed today while following up on Canada's free trade deal with Columbia is that the Prohibition era in the US spanned 1920-1933. If the current crisis is an echo of the 20's then it is possible that Obama may end the war on drugs as well.

  5. Vincent Christianson on December 1, 2008 12:54 am

    I wish we would all start calling this “The Great Bush Depression” so that it goes down in history for what it really is.

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