Will There be a Depression?

The Panic of 1921 and Crash of 1929 were similar bubble bursts and actally the Panic of 1921 was a worse drop, but different business climates and different reactions caused 1929 to lead to the Great Depression. The difference between the Panic of 1921 and 1929 were these three things:

1. The Panic of 1921 came in an era of decreasing trade restrictions (even while increasing tariffs) and lowering taxes, while 1929 was in an era of Hoover increasing taxes and protectionism. When Coolidge was elected, he significantly reduced taxes and increased trade, and led to the greatest creation of wealth that we had seen to that point. It did lead to the bubble and crash at the end of the decade, but if managed properly, it wouldn't have been a Depression. Roosevelt increased taxes significantly and kept the Depression going for years (still, work projects kept them from complaining about it too much).

2. After 1921, the Fed increased the money supply to keep credit flowing. Because loose credit had caused the bubble that led to the 1929 Crash, the Fed responded by decreasing the money supply, exacerbating the problem.

3. After 1921, growth was relatively uninterrupted by disaster. In 1930, the Dust Bowl hit, doing serious damage to our agricultural production for 6 years.

So unless we contract the money supply, significantly reduce trade or increase taxes, or have a widespread disaster, we should rebound from this pretty quickly.

 

Not sure if there will be something similar to the great depression, but I do believe something short-term will occur...It may last longer if nothing is done about it...I am a believer in free market, however, there are times when something must be done...

 

Another reason this won't be as horrible as people think:


Source

And I've heard rumors that the Q3 Savings rate will be as high as 7%. More deposits means more credit available from secure banks, however, personal savings are disproportionately at small banks and credit unions as opposed to credit and corporate savings from big banks. Even if the big banks crash, credit will be available, but from different sources.

I personally think that decentralization and increased competition in banking is a great thing.

 

Increased money supply doesn't do much if the banks aren't lending the money out to the public. Its just like if the government drops rates but banks don't, that doesn't directly help the borrower - it does help the lender a bit by increasing his spreads (again assuming he is lending and at fixed rates).

 

I don't know, but my wife is a manager at a huge engineering company and her office focuses on Oil/Gas. Today they will be discussing cutting costs. Again, this is in oil/gas. think about that

 

In THEORY, however, if the money is there, whether from the government or from personal savings influx, or whatever, competition among banks will make them lend it. The profit is too much to ignore eventually, and some bank somewhere will open up their money supply, and other will follow suit because they don't want to miss out on the profits. Again, in THEORY if the money is there.

 

Theory is correct...except that assume perfectly rational behavior...Banks will be very conscious of a run on their deposits, concern about credit worthiness of borrowers, and gun shy after what has transpired already.... missing out on profits is less of a concern for these guys now that they've seen the graveyard of other banks that chased profits.

 

Jesus, partisanship is nuts. Why are you doing your damndest to ruin a decent informative thread?

 

isnt it always a managers objective to cut costs?


but i personally don't think it will be as bad as some think, and certainly not as bad as the media if talking about.

Agree completely.

Will lendors be tighter? yes, but then again, they probably should be because thats good, sound, business. Afterall, isnt loose lending what brought us to this state?

Personally, i think a little reality check is needed and too many people forgot the fundamentals.

 

You guys don't realize how much depends on credit. It's not just banks lending to consumers but banks lending to banks. How do you think the small banks are going to survive when the big banks they borrow from go bust? Related to that, the commercial paper market is starting to dry up. Without commercial paper, there's a very good chance that your paychecks probably don't clear on Friday.

 

Sorry, fellas. Carry on. I'll butt out and just read. I admit I honestly don't understand any of this stuff. I'm fairly stupid when it comes to economic matters generally and I have no understanding whatsoever of the current situation or the implications of the bailout bill. (I am curious as to how McCain gets a pass on going from "fundamentals are strong" to we are in crisis, but you and Cheetah are right that this thread isn't the place for that.)

Educate me. Seriously.

 

My post in the other thread:

I hope to impress upon people the importance of the bill as well as the importance of the timing of the bill, i.e. why we can't wait "a couple of weeks" like some suggested. Let me start by saying that I am a conservative (though not a Republican). So when even I think the bailout is necessary, I hope people can see the severity of the problem.

Prudential Short Fund went on record the other day saying the Dow could reach 6000. I'm not so doom and gloom but I could see it hitting the 8000's. The only thing that could have had a chance to prevent it was the bailout package.

Now, supporting the bailout doesn't mean you like it. I don't. And I'll tell you why I don't. It is money the US will have to pay sooner or later. So my view was this: as you know, today is fiscal year end for the government. If bailout goes through, the banks are saved but the broader economy takes the hit. If it fails, the banks fail and the broader economy will take a hit as well.

As a matter of fact, I plan to short like crazy once the financial short bans are lifted come October 2, with a call option of course and I've amassed 200 grand cash to cover for margin calls, though I doubt I'll need it (if anyone asks, you didn't hear anything from me).

So the bailout package is the difference between a hard landing and a crash landing. No I don't like it, but not bailing out the financial system would be a lot worse.

Secondly, the timing of the issue. As you might already know, we are at a time when several pretty lousy events all lumped together. I've already mentioned the fiscal year end. In a couple of days you'll get the economic reports, it won't be pretty.

Furthermore, as you may know, Congress broke for the Jewish holidays today, and boy there are a lot of them in October. The first day they come back is gasp, the day the financial short ban is lifted. As soon as the bill was introduced I said to myself, they better pass this or it will be two weeks before we see the package. That is now looking quite optimistic. Even IF they pass it on Thursday, it'll still have to go through the Senate, while the US economy is bleeding money.

All of this could have been clearly seen as soon as the short ban was applied (or for people in the know, even earlier) but Congress still *****ed it up.

Make no mistakes about it ladies and gentlemen, we are in historic times ladies and gentlemen. The problem is that it's a sh1tty one.

 

Yes, there will be a depression. (Note to historical illiterates: I did not preface it with "Great.")

There are too many spindly legs propping our economy up. We have a society based on access to credit that is too easily obtained. We need to change and that will be more painful than the recessions of the last few decades.

 

B-B-B-But theres an economist that said this wouldn't work. I don't know why it won't work, and I don't know anything about finance, but I'll believe him because he's an ECONOMIST. We need to go back to square one and fix regulation. In the meanwhile, forget about the bailout. I'm not footing the bill for Wall Street because it only helps them.



Idiots.

 

I think the point a number of us are trying to make (in addition to the fact that the current proposal is crap) is that there needs to be a change in how we use credit. That we have become so dependent on it from both an individual consumer level and an institutional level is unsustainable. If we have to experience some pain to wean ourselves, so be it... I want it done now, preferably with softeners... but I don't want to drag it out.

What you don't seem to understand is that the world of finance and macroeconomics has changed dramatically in the last 6 months or so and nothing that is done now will take us back to that place. I understand this is difficult, so take comfort in rereading your little Finance textbooks and looking over your notes from B-school while you deal with the uncertainty by pretending you are certain.

 

Is this used as an example of what might happen or are you saying this will happen Friday?

 

Nobody can say for certain what passage of the bail out is going to do but it could go down this way...

1. Immediate pump to the markets- possibly getting into the 11,000 territory again.
2. Within about 30 days the entire 700 billion could be into the system. (I seriously doubt Congress will try to stop that right before the election)
3. Banks probably will continue to tighten credit.
4. Banks most likely will follow what Japanese banks did after their real estate loan meltdown and look for safety... which means credit could tighten even further as Banks start buying Treasuries or any safe way of stabilizing- hoarding their assets. Don't look for banks to be so cavalier when making dubious loans over the next few weeks.
5. Home prices will continue to decline- guarantee it.
6. Home mortgages will continue to default, since I think at this time about 10% of all home loans are either in arrears or default. guarantee it.

Anyway you look at it I think it is highly unlikely that credit will NOT continue to tighten, the bail out will probably cause a brief let up (one week?); but by Jan. I don't think things will recover that much and I expect credit to tighten even more into next year.

Whatever you want to call this thing... it may be already entrenched.

Of course after the bail out I could be very wrong and people and business will rush to borrow and banks will be giddy about lending and another credit bubble will save the day.

 

The point is I don't disagree with a change in lending qualifications and oversight and regulations, but this is not the time to keep delaying the bill and have it try to fix everything you want in one shot. It only does us more damage by prolonging it and the damage it is doing is not "some pain," The damage gets deeper and deeper by the day and it is damage that will be extremely difficult to repair. It's exponential.

The world of finance has changed? I'm sorry but the basics of the financial system that is the backbone of the US economy has not changed. You seem to be content with "some pain" yet you don't even know the basics of money and banking. How are you SO certain that it'll be just "some pain" and nothing more than that? I have yet to see you post any concepts or support backing your claims. I along with the other people who have some expertise on this situation on the board have given the support for our claims. Yet you continue to sound like a broken record. I'm not pretending I'm certain. I am certain. A whole lot more than you.

 

If the commercial paper market went down, and there has already been a serious pullback from it, yes it would happen very soon due to the short term nature of commercial paper loans.