Tuesday, September 23, 2008

Bailout...Agree or Disagree?

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Well, I agree with the bailout as long as the restrictions are being enforced and that we're not padding the pockets of the extremely wealthy with taxpayer dollars. We can't just sit by and let the economy collapse...that would be catastrophic. But, this next President is going to have some work to do getting our National Debt down. Goods and Services are going to increase and the dollar will be worth less and less. That's not a solution...the credit card companies are licking their chops. People will be forced to go that route just to survive...thinking it's short term. I personally will have to get a second job soon if things get much worse then they are now. I'm not creating more debt for myself.

I have no problem with a bail out, so long as investors loose their shirts, execs loose their parachutes and fined large for their part. I also think that all assets associated with that lost be sold with proceeds going back in to offset the bail out.
However, in order for this to work, those that lost their homes due to this ruthless lending practice need forgiven this one event so that they maybe able to finance a new beginning. The Great depression saw foreclosed property being rented back to the defaulters until they could again buy back the asset. Maybe that program could work again.

Great Depression Synopsis

In the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.

At least in part, the Great Depression was caused by underlying weaknesses and imbalances within the U.S. economy that had been obscured by the boom psychology and speculative euphoria of the 1920s. The Depression exposed those weaknesses, as it did the inability of the nation's political and financial institutions to cope with the vicious downward economic cycle that had set in by 1930. Prior to the Great Depression, governments traditionally took little or no action in times of business downturn, relying instead on impersonal market forces to achieve the necessary economic correction. But market forces alone proved unable to achieve the desired recovery in the early years of the Great Depression, and this painful discovery eventually inspired some fundamental changes in the United States' economic structure. After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.

Do you see any correlation with todays crisis and that of the Great Depression? If not, tune in later for my observance and commentary.

1 comment:

allee said...

Doooooood. You chose some of my favoritest subjects today: The economy and the Depression.

Since I feel the Federal Reserve Act was a crime perpetrated against the American people, I cannot help but feel this "bailout" is little more than saying the first crime was no big deal and allowing a second to justify the first. Like we decided it was okay to knock an old lady down to steal her purse then letting the thief came back to kick her and rob her again because he forgot her wedding band. And laughing about it.

The central bank creates an environment leading us where we seem all too willing to follow - false manipulation of the markets to tweak a penny until it screams for the benefit of the banking elite followed by, unfortunately, the inevitable fast and hard blow in the form of recession that (of course) strikes the little guy below the belt just because he bought food and shelter instead of a nut cup.

The more manipulation, the harder the retaliation by the economy; much like in physics, there is an equal and opposite reaction. Factor in the natural ebb and flow of the economy and you've got a disaster waiting to happen. LIKE THE ENVIRONMENT, the economy has mechanisms of self-correction. We don't like how those make us feel, though; they don't leave us feeling all warm and gooey inside, so we try to avoid them by manipulating the system. But like water behind a dam, stuffing bubble gum in one hole doesn't keep the water from flowing, it only forces the water to find another outlet. Eventually, (and I love this analogy, so I use and over-abuse it) we experience the financial equivalent of Teton... The Great Depression.

Unfortunately, we didn't learn the lessons taught to us by history, so we are doomed to repeat it. We've allowed much more sophisticated manipulation and on much grander scale since the time of the Great Depression. Those self-corrections will be much harsher than those of the past andm in turn, the results far worse. I know I've ranted my doom and gloom before, last time you dangled this subject in front of me, but I say it again. The next Depression will be far more devastating than the last - economically and socially.

This is interesting reading, if you're interested:

http://www.kwaves.com/kond_overview.htm