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Exsubmariner
Hidden Depths


Reged: 10/27/04
Posts: 2510
Loc: Doing It Deeper
The differences between 1929 and Today
      #13168270 - 11/29/07 08:15 AM

All the chicken-little-OMFG-The-Sky-Is-Falling-We're-Already-In-The-Next-Great-Depression talk has be bothered to the point that I did a little review about the Great Depression.

Namely, I had an eye toward debate about the causes. There are some important differences that I think warrent discussion.

First and foremost - Many on this board believe in the assertion that the Great Depression was caused by a contraction of the money supply. Regardless of the validity of this assertion, one must concede that there is no such contraction occuring today.

The Fed's Policy and Impact - In the early 1930's, the Fed as an entity did not have the experience nor the influence over the capital markets that it does today. It's best practices were not as refined. In short, successful organizations learn over time.

The Information Age - The world was not as connected then as it is today. It was harder to verify information and investors and money managers were not as savvy as today at detecting [censored] rumors.

Dollar as the world reserve currency - In the 1930's the Dollar WAS NOT the world reserve currency. Trillions of Dollars were not held overseas waiting for bargain shopping in America as soon as the stock market went down. Today, this serves as a feedback mechanism that will bring capital back into the capital markets.

Gold backed currencies - In the early 1930's, many world currencies were backed by gold, INCLUDING THE US DOLLAR. This put an artificial choke hold on the availability of cash that does not exist today. Today, the major players in the currency market are fiat or pegged in some way to the dollar. Regardless of the arguements in favor of gold backing, the world currency market is not restricted by gold today.

Trade - The world was not as interdependant in 1930 as it is today. Borders were far more important to business than they are today. Protectionism was a far more ready and feasible fall-back position in face of an economic crisis then. Today, we have no choice. The economy depends on trade. We must trade. Period. Not the case in 1930.

In closing - The world is a different place than in 1930. I submit that the fears concerning the collapse of the international monetary system are based on ideas concerning the causes of the Great Depression that have little or no significance to the modern reality. They are therefore irrational.

Discuss.


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ConstantineX
addict


Reged: 05/08/06
Posts: 658
Loc: Like PETA, ride for my animals
Re: The differences between 1929 and Today [Re: Exsubmariner]
      #13168358 - 11/29/07 08:35 AM

I was one of the more skeptical posters on the recent "Depression" rhetoric and the general paranoia of many Misean theories. I have generally believed that we use sound monetary policy.

But different readings lately have convinced me that the US is going to fall into a recession, possibly a very deep one in 2008. I am also not confident in Americans' standard of living because the Fed seems very likely to capitulate AGAIN on interest rates as futures are already pricing in a rate cut which I have been convinced will lead to stagflation. There seems to be a formula for sound central monetary policy but it seems that political considerations will trump holding firm yet again. There was alot, perhaps unprecedented, mal-investment in housing.

I think I"ll expound more later in the evening.

Edited by ConstantineX (11/29/07 08:39 AM)


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BluffTHIS!
censor stultorum


Reged: 11/22/04
Posts: 10311
Loc: I can hold my breath longer th...
Re: The differences between 1929 and Today [Re: ConstantineX]
      #13168460 - 11/29/07 08:54 AM

The AC'ers (and others) do have a point about fiat currency and its effects. Even though most of us do favor fractional reserve banking, it still matters what number is picked as the fraction. Unrestrained lending to people/companies with bad prospects has consequences, and ones that can ripple through the economy. When lenders and debtors can expect *absolutely no bailouts* by the gov't in *any form*, then the market can can operate better, if not perfectly. It seems to me that lenders, especially credit card companies and mortgage lenders, aren't incentivized to operate with more realistic standards because history teaches they and their debtors can cry to mommy gov't and get relieved of suffering much of the consequences of their own actions.

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adios
Carpal \'Tunnel


Reged: 09/02/02
Posts: 8132
Re: The differences between 1929 and Today [Re: BluffTHIS!]
      #13168800 - 11/29/07 09:44 AM

Quote:

The AC'ers (and others) do have a point about fiat currency and its effects. Even though most of us do favor fractional reserve banking, it still matters what number is picked as the fraction. Unrestrained lending to people/companies with bad prospects has consequences, and ones that can ripple through the economy. When lenders and debtors can expect *absolutely no bailouts* by the gov't in *any form*, then the market can can operate better, if not perfectly. It seems to me that lenders, especially credit card companies and mortgage lenders, aren't incentivized to operate with more realisti c standards because history teaches they and their debtors can cry to mommy gov't and get relieved of suffering much of the consequences of their own actions.




A lot of mortgage lenders have gone belly up. CFC is on the ropes but they seem to be trying to attract more deposit money in their banking arm. Citi and others have had a lot of losses reported. Not sure how the Fed is exactly bailing these folks out. You're making the moral hazard argument and the Fed has provided more short term liquidity because some normally credit worthy borrowers are having trouble finding funds to borrow short term. That's basically a credit crunch. I agree that ceeding government the power over the currency is ceeding government a lot of power. Not sure though that there's a "moral hazard" with the Fed cutting it's rates at this time. I do think the economic impact of this will be to reduce recession chances.


Kind of had a funny thought here. The bond rating agencies were apparently flat out wrong about rating the bonds derived from many CMOs. The bond rating agencies are unregulated as far as I know. Perhaps that should change.


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Exsubmariner
Hidden Depths


Reged: 10/27/04
Posts: 2510
Loc: Doing It Deeper
Re: The differences between 1929 and Today [Re: adios]
      #13169484 - 11/29/07 11:00 AM

Quote:

the Fed has provided more short term liquidity because some normally credit worthy borrowers are having trouble finding funds to borrow short term. That's basically a credit crunch.




Exactly. The Fed is helping with liquidity. Putting liquidity into a market does not equal a bailout.

Quote:

Kind of had a funny thought here. The bond rating agencies were apparently flat out wrong about rating the bonds derived from many CMOs. The bond rating agencies are unregulated as far as I know. Perhaps that should change.




Yes. Conceptually, I have always had a problem with the financial ratings system. Basically, the ratings system exists to encourage people to buy financial instruments. Naturally, they are only going to say things that will make those instruments look attractive. It's kind of an incentive to fudge things. Shades of Enron.


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Exsubmariner
Hidden Depths


Reged: 10/27/04
Posts: 2510
Loc: Doing It Deeper
Re: The differences between 1929 and Today [Re: ConstantineX]
      #13169535 - 11/29/07 11:05 AM

Quote:

There was alot, perhaps unprecedented, mal-investment in housing.






Yes. The effect the rest of the economy (which is about to awash with investment as dollars come back into the economy) is going to have on the relative magnitude of that impact is yet to be seen.

I kind of suspect that after everything settles out, people's wealth is going to be shifting back to the stock market as opposed to real estate. Back in the 90's everyone was making a killing in stocks. Then we shifted to our houses. I think everything is going to swing back to stocks.


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adios
Carpal \'Tunnel


Reged: 09/02/02
Posts: 8132
Re: The differences between 1929 and Today [Re: Exsubmariner]
      #13169610 - 11/29/07 11:12 AM

Quote:

Yes. Conceptually, I have always had a problem with the financial ratings system. Basically, the ratings system exists to encourage people to buy financial instruments. Naturally, they are only going to say things that will make those instruments look attractive. It's kind of an incentive to fudge things. Shades of Enron.




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tolbiny
*


Reged: 03/11/04
Posts: 7347
Re: The differences between 1929 and Today [Re: Exsubmariner]
      #13169701 - 11/29/07 11:21 AM

Quote:


First and foremost - Many on this board believe in the assertion that the Great Depression was caused by a contraction of the money supply. Regardless of the validity of this assertion, one must concede that there is no such contraction occuring today.





If you are (and I think you are) talking about Austrian theory it is important to note a few points. The first is the distinction between the market crash of 1929 and the initial recession that followed. The depression that followed was caused by government intervention in the markets preventing corrections from taking place. Secondly the market crash and ensuing recession were not "caused by" a contraction in the money supply, they were caused by the expansion of the money supply. The contraction was a symptom of the weakness in the economy that existed in reality. When people started to run on the banks it was because they realized that there wasn't enough money going around like they thought, their realization didn't change the fact of the reality, it just acknowledged it. Likewise today we have an expansion of the money supply followed by the symptoms of a weakened economy, instead of a contraction we are experiencing the subprime issues, inflation and a weakening dollar because some of the other underlying issues are different, but they point to difficult times ahead.



Quote:


The Fed's Policy and Impact - In the early 1930's, the Fed as an entity did not have the experience nor the influence over the capital markets that it does today. It's best practices were not as refined. In short, successful organizations learn over time.




This discussion has gone on for a long time, but short and sweet what makes you think the fed is a successful organization? Since its founding there has been the great depression, the stagflation of the 70s, the market crash of 87, the tech bubble burst and now the issues that are causing the concern in the here and now. The second questionable assumption is that the fed has the tools to actually fix these problems.

Quote:


Dollar as the world reserve currency - In the 1930's the Dollar WAS NOT the world reserve currency. Trillions of Dollars were not held overseas waiting for bargain shopping in America as soon as the stock market went down. Today, this serves as a feedback mechanism that will bring capital back into the capital markets.




This won't provide any protection for the American consumer, this will be inflation in prices for them. This will also weaken the dollar further, people who used to save masses of dollars spending them will drive the value into the floor.

Quote:


Gold backed currencies - In the early 1930's, many world currencies were backed by gold, INCLUDING THE US DOLLAR. This put an artificial choke hold on the availability of cash that does not exist today. Today, the major players in the currency market are fiat or pegged in some way to the dollar. Regardless of the arguements in favor of gold backing, the world currency market is not restricted by gold today.




Its an easy trap to fall into, but overall markets are not driven by currencies, they are driven by production of goods and services.


Honestly the one main difference between your position and the Austrian one is the view of what causes what. For an Austrian the majority of the problems in major crashes like this can be traced back to expansionary monetary policies while you believe that those expansionary monetary policies are the solution to these problems.


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The Don
Pooh-Bah


Reged: 06/21/05
Posts: 1656
Loc: Baltimore
Re: The differences between 1929 and Today [Re: Exsubmariner]
      #13170096 - 11/29/07 11:55 AM

Well done OP... finally an interesting topic.

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bocablkr
veteran


Reged: 03/15/05
Posts: 1467
Loc: South Florida
Re: The differences between 1929 and Today [Re: Exsubmariner]
      #13170123 - 11/29/07 11:57 AM

Social Security!

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