The differences between 1929 and Today

[ConstantineX]

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.

[BluffTHIS!]

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.

[adios]

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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.

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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.

[Exsubmariner]

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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.

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

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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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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.

[adios]

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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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[DcifrThs]

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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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one thing to add here is that the ratings agencies were suspect when yields on a AAA rated CDOs were higher than similarly rated securities. but the excess liquidity forced investment into these since it was so attractive and so cheap to borrow.

one thing that wasn't aken into acct by ratings agencies was liquidity premium and other trading type considerations. these certainly affect the yield on securities and the market saw things that ratings agencies didn't.

Barron

[theseus51]

It was the fed printing too much money to begin with. Yeah, there was a "gold standard", but the fed kept printing money anyway. The only reason we went off the gold standard in 1933 was too many people wanted to redeem their paper federal reserve notes for real gold. We went off the gold standard once that couldn't be achieved, because there wasn't enough real gold to back the worthless pieces of paper issued be the fed.

What that means, is we never really had a gold standard to begin with. If we did, we wouldn't have run out of gold, and be forced to confiscate everyone's gold to make up the difference, as FDR did.

Cheap credit caused people to over invest and over speculate, leading to bubbles, which eventually burst. The depression of 1929 may not happen in exactly the same way (what two recessions are exactly the same anyway?). But I fear the federal reserve has set us up for a big downturn in the coming years.

[Exsubmariner]

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



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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.