The Great Depression of 2008

The Great Depression of 2008
Leeroy F. Dermit
Sep 27, 2008

http://www.leeroyfdermit.com/2008/09/
great-depression-of-2008.html

On issue after issue, every time I dig deeper and think for myself, I discover that government is the cause – not the cure, but if free markets are so great, then how have we come within days of another Great Depression? Is it really about free markets vs. regulation? Is it naked short sellers? How big a factor is consumer and business confidence? Do the media and politicians really understand economics? Could there be economic terrorism afoot?

Conventional Wisdom

The conventional wisdom just doesn’t add up.

The conventional wisdom is that America has been in recession since late 2007, and that the cause is 20 years of Republican deregulation. Deregulation supposedly caused a recession by causing the prices for oil, steel, copper, etc. to soar, by allowing some greedy people to sell loans to some people who couldn’t afford them, and by allowing some people to more easily bet that stocks will go down (naked short sellers).

By August 28th, I had lost 3% of my savings, so how had I lost 53% of my savings by October 10th?

The conventional wisdom is obviously a myth, so we are going to have to look at a lot of facts and think for ourselves.

Free Markets

The argument for deregulation, free markets, competition, etc. is that although problems (both internal and external) can occur at all levels and at all times, for each kind of problem, some competitors will have made the right decisions to survive while those who made the wrong decisions will fail. Failure makes room for new competitors. Also, competitors can learn from past mistakes. Therefore, while every kind of problem big and small can happen once, free markets continually adapt and improve, and thus a future recurrence of that problem is unlikely. Free markets are thus more likely to serve customers best.

Unlike businesses and private organizations, government is a monopoly that forbids competition and forces us to buy its services, and thus government is less accountable and less adaptable than businesses. Therefore, government can afford to be inefficient and can make the same mistakes over and over again. Government is thus more likely to cause a problem than to solve one.

This is a pretty good summary of the argument for free markets.

Liberal Fascists

The argument for regulation may have been best summarized by Mario Palmieri (“The Philosophy of Fascism”, 1936):

Economic initiative cannot be left to the arbitrary decisions of private individual interest. Open competition, if not wisely directed and restricted, actually destroys wealth instead of creating it.

I used to think that regulation was the new form of socialism, but then I read this quote, and now I see that the Democrats are not really socialists – but are fascists. Therefore, we could accurately refer to the Democrats as socialists or as fascists – but let’s not get sidetracked.

American Capitalism

America does not really have free markets (a.k.a. capitalism). We have the second highest business taxes in the world, a ton of regulations, a load of frivolous lawsuits, the Federal Reserve, the IRS, Fannie Mae, Freddie Mac, the Securities Exchange Commission, etc.

The trend is not purely deregulation either. We now have Sarbanes Oxley, a resurgence of The Community Reinvestment Act, etc.

Of course, we do have some scary deregulation too. For example, we now have naked short sellers.

The Community Reinvestment Act

Everybody knows that banks gave loans to people who could not pay them back, and that this supposedly wouldn’t happen in a free market – which is true. However, we don’t have a free market.

The government instituted the community Reinvestment Act which ordered Fannie Mae to encourage banks to give loans to poor people and minorities regardless of credit worthiness – because that is fair, and socialism is fair if it is anything.

Freddie Mac was charged with converting these subprime loans into Mortgage Backed Securities.

Don’t take my word for it. Wikipedia says:

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were "risky mortgages."

What did the Bush Administration do?

In 2003, the Bush Administration recommended that a new Department of the Treasury agency should supervise the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac. Congressional support was approximately split along Party lines and the proposal eventually failed.

What did Obama do? Obama worked with ACORN to train activists to pressure banks to make bad loans. Any bank that wants to expand or merge with another has to show it has complied with CRA – and approval can be held up by complaints filed by groups like ACORN. I got this fact from a very revealing article about Obama/ACORN at: Obama helps ACORN set up Homeowners for Failure.

Clearly, the CRA is an example of increasing regulation (and Democrats) contributing to the current financial crisis.

Fannie Mae

To better understand how the government (not Wall Street) is a major cause at the center of the subprime mess, it is helpful to first understand that Fannie Mae and Freddie Mac are basically an arm of the Democratic party.

Sarbanes-Oxley

Part of the Sarbanes-Oxley regulation (instituted to prevent another Enron) requires the use of Mark-to-Market accounting – even in cases such as those instruments created by government institution Freddie Mac known as Mortgage Backed Securities (perhaps an unintended consequence?). Therefore, MBSs are treated just like stock even though there are real houses with their own market values as collateral for them, and thus at the end of a day, if the market value of those MBSs (not the houses) is too low, then a bank may not have enough money to pay the margin call unless they sell enough assets at a huge loss. In July This happened to Merrill Lynch who had to sell 30.6 billion dollars worth of MBSs for 6 billion. The houses alone were worth 25 billion.

Again, we see that government intervention itself has contributed to the current economic crisis.

The Fed did It

As we all know, Alan Greenspan artificially lowered interest rates in a largely successful (although now temporary) attempt to bring us out of the great Clinton.com crash at the end of the Clinton administration, which of course continued into the Bush administration.

Low rates obviously contributed greatly to the housing bubble. Low rates also increased the supply of dollars through increased borrowing, which thus weakened the dollar.

Again, we see that government intervention itself has contributed to the current economic crisis, and guess what – they’re doing it again!

The Cities did it

Perhaps the other main contributor to the housing bubble (in addition to the Fed) is the rapidly growing trend of local government intervention known as Managed Growth. It takes many forms, but Managed Growth typically is where a city restricts permits for new houses and buys up land along its outskirts to prevent development there too.

Note that cities such as Atlanta, Houston, and Dallas did not employ managed growth and thus continued to have steady housing appreciation consistent with previous decades. Consequently, housing prices in these cities did not fall (except for a little bit very recently).

Again, we see that government intervention itself has contributed to the current economic crisis, and guess what – they’re still doing it!

It’s Confidence Stupid

By all accounts, the overall problem in the market that has suddenly turned the problems of a few banks and home owners into another Great Depression – is a loss of confidence.

Just a few months ago, most businesses were still having record profits, but if consumers and businesses lose confidence and fear a recession, then they will spend less and pay down debt – which will cause a recession!

Markets Succeed where Governments Fail

What did happen was that Russia invaded Georgia, and Obama was utterly powerless to do anything about it. The US government was utterly powerless, and the European Union was just as powerless.

However, another force more powerful than the US Government, the European Union, and even more powerful than Barack Obama … forced Russia to promptly withdraw from Georgia.

In a nutshell, Putin had been acting aggressively, such as flying nuclear bombers to the edge of Alaskan airspace, then he invaded Georgia, and his agression caused foreign investors and businesses to flee Russia. Whereas, the governments of America and Europe failed to influence Russia in the least, market forces brought the conflict to a prompt end.

The conventional wisdom is that government solves problems created by markets, but we now see that markets solve problems created government – such as war.

Conclusion

I know it is hard to stop thinking about those naked short sellers, but the reality is that politicians, government, laws, regulation, etc. are the cause of the current economic crisis. The media and the Democrats call for more government, and no strong voice has countered them, but we now know that government is a problem masquerading as its own cure.

Neither political party has shown the slightest understanding of economics. The Democrats, the media, and Obama blame deregulation, and all John McCain can do is look guilty. I thought he was going to cry at the beginning of the first Presidential debate. PULEEEASE!

I know of precisely ONE politician who understands – Ron Paul.

You won’t hear any of THIS on MSNBC. Does that make Keith Olberman the – WORST PERSON IN THE WORLD? J

Let’s summarize:

The conventional wisdom is that Republicans, free-markets, and deregulation caused the current economic crisis; whereas, the reality is that Democrats, government, and regulation caused the current economic crisis.

1. Alan Greenspan helped cause a housing bubble when he lowered interest rates in a largely successful attempt to bring us out of the crash at the end of the Clinton administration.

2. Managed growth laws by local governments also contributed greatly to the housing bubble.

3. The Community Reinvestment Act caused a proliferation of subprime loans, which implicates Clinton, Obama, ACORN, Fannie Mae, and the whole Democratic Party.

4. The Democratic Party and most of the mainstream media have been working diligently to spread fear and reduce confidence, and fear causes recessionary behavior.

5. The new Sarbanes-Oxley regulations caused the new government mandated Mortgage Backed Securities to be valued at the market price (Mark-to-Market) at the end of each day, which caused banks to go under with little forewarning.

6. The war in Iraq has played a small role, but has reduced confidence in America and the dollar.

7. Markets solve problems, like the Russian invasion of Georgia, where governments are powerless.

The Future

Maybe once the people learn the reality, they will have a greater desire for freedom.

The promise of reality is freedom.

Ireland officially in recession

Ireland officially in recession
Press Association
Sep 25, 2008

http://www.independent.co.uk/news/world/europe/
ireland-officially-in-.htmlssion-942071.html

Ireland has officially fallen into recession, new figures revealed today.

According to the Central Statistics Office, the country's once-aggressive economy contracted by 1 per cent in the first six months of the year.

Dubbed the Celtic Tiger during massive growth in the late 1990s, the Irish business sector is now facing its most difficult period since high unemployment and emigration hit the 1980s.

The Department of Finance pointed to the crumbling property market and the international credit crunch for the alarming figures.

The figures support predictions from some of the country's leading financial experts, including those at the state's influential think-tank the Economic and Social Research Institute (ESRI).

It warned earlier this year that Ireland was facing its first recession since 1983, unemployment would rise and 20,000 people would emigrate.

The Budget, traditionally held in December, was moved forward six weeks by Taoiseach Brian Cowen in an attempt to reduce the knock-on effects of the now shrinking economy.

'Tens of thousands to be laid off every week' as UK falls into recession

'Tens of thousands to be laid off every week' as UK falls into recession
Graeme Wearden
guardian.co.uk,
Sep 11, 2008

http://www.guardian.co.uk/business/2008/sep/11/recession.unemploymentdata

MPC member warns of 'horrible surprise'
Gloomy assessment sends London shares falling

Tens of thousands of people could be laid off every week in the run-up to Christmas as the UK economy falls into recession, David Blanchflower of the Bank of England's monetary policy committee warned today.

Blanchflower told MPs to expect "a large increase in unemployment", and warned that a "horrible surprise" could be just around the corner. The gloomy assessment sent shares in London falling, and also weakened sterling yet further against the dollar.

Blanchflower, who has repeatedly tried and failed in recent months to persuade the MPC to cut interest rates, predicted that the unemployment count will rise by 60,000 a month for several months in a row, probably starting in October.

Once in 100 Year Crisis?

Once in 100 Year Crisis?
Joe Average
Sep 02, 2008

http://www.financialsense.com/fsu/editorials/swagell/2008/0902.html

Robert Prechter has long been a lone voice in the wilderness warning of an imminent deadly deflationary collapse into global recession/depression rather than an extended hyperinflationary blow-off (despite the frantic efforts of desperate central bankers to inflate money supply). Now it seems respected financial guru Richard Russell (Dow Theory Letters) has similar concerns;

"...the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations...sophisticated money is cashing out, raising cash, preparing for world deflation. This is why gold has been sinking...why stocks have been falling. What I see is a coming world deflation. What’s the best stance in a deflationary situation? Lots of cash...US Dollars and US Treasury paper".

List of recessions in the United States

List of recessions in the United States
Wikipedia

http://en.wikipedia.org/wiki/List_of_recessions

Panic of 1797 (1797-1800)
The effects of the deflation of the Bank of England crossed the Atlantic Ocean to North America and disrupted commercial and real estate markets in the United States and the Caribbean. Britain's economy was greatly affected by developing disflationary repercussions because it was fighting France in the French Revolutionary Wars at the time.

Depression of 1807 (1807-1814)
The Embargo Act of 1807 was passed by the United States Congress under President Thomas Jefferson. It devastated shipping-related industries. The Federalists fought the embargo and allowed smuggling to take place in New England.

Panic of 1819 (1819-1824)
The first major financial crisis in the United States featured widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It also marked the end of the economic expansion that followed the War of 1812.

Panic of 1837 (1837-1843)
A sharp downturn in the American economy was caused by bank failures and lack of confidence in the paper currency. Speculation markets were greatly affected when American banks stopped payment in specie (gold and silver coinage).

Panic of 1857 (1857-1860)
Failure of the Ohio Life Insurance and Trust Company burst a European speculative bubble in United States railroads and caused a loss of confidence in American banks. Over 5,000 businesses failed within the first year of the Panic, and unemployment was accompanied by protest meetings in urban areas.

Panic of 1873 (1873-1879)
Economic problems in Europe prompted the failure of the Jay Cooke & Company, the largest bank in the United States, which bursted the post- Civil War speculative bubble. The Coinage Act of 1873 also contributed by immediately depressing the price of silver, which hurt North American mining interests.

Long Depression (1873-1896)
The collapse of the Vienna Stock Exchange caused a depression that spread throughout the world. It is important to note that during this period, the global industrial production greatly increased. In the United States, for example, industrial output increased fourfold.

Panic of 1893 (1893-1896)
Failure of the United States Reading Railroad and withdrawal of European investment lead to a stock market and banking collapse. This Panic was also precipitated in part by a run on the gold supply.

Panic of 1907 (1907-1908)
A run on Knickerbocker Trust Company stock on October 22, 1907 set events in motion that would later lead to the Great Depression in the United States.

Post-World War I recession (1918-1921)
Severe hyperinflation in Europe took place over production in North America. It was a brief, but very sharp recession and was caused by the end of wartime production, along with an influx of labor from returning troops. This in turn caused high unemployment.

Great Depression (1929-1939)
Stock markets crashed worldwide, and a banking collapse took place in the United States. This sparked a global downturn, including a second, more minor recession in the United States, the Recession of 1937.

Recession of 1953 (1953-1954)
After a post- Korean War inflationary period, more funds were transferred into national security. The Federal Reserve changed monetary policy to be more restrictive in 1952 due to fears of further inflation.

Recession of 1957 (1957-1958)
Monetary policy was tightened during the two years preceding 1957, followed by an easing of policy at the end of 1957. The budget balance resulted in a change in budget surplus of 0.8% of GDP in 1957 to a budget deficit of 0.6% of GDP in 1958, and then to 2.6% of GDP in 1959.

1973 oil crisis (1973-1975)
A quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War lead to stagflation in the United States.

Early 1980s recession (1980-1982)
The Iranian Revolution sharply increased the price of oil around the world in 1979, causing the 1979 energy crisis. This was caused by the new regime in power in Iran, which exported oil at inconsistent intervals and at a lower volume, forcing prices to go up. Tight monetary policy in the United States to control inflation lead to another recession. The changes were made largely because of inflation that was carried over from the previous decade due to the 1973 oil crisis and the 1979 energy crisis.

Early 1990s recession (1990-1991)
Industrial production and manufacturing-trade sales decreased in early 1991.

Early 2000s recession (2001-2003)
The collapse of the dot-com bubble, the September 11th attacks, and accounting scandals contributed to a relatively mild contraction in the North American economy.

NAB will shock Wall Street

NAB will shock Wall Street
Business Spectator
Robert Gottliebsen
25 Jul 2008

http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=sph

The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a "meltdown".

We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans - an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

Two new dead banks, 2,200 more coming, FDIC bailout

Two new dead banks, 2,200 more coming, FDIC bailout
by Stranded Wind
Sat Jul 26, 2008 at 05:45:02 AM PDT

http://www.dailykos.com/story/2008/7/26/8327/37155/49/557261

I called the death of Indymac Bancorp on Monday, July 7th. The Federal Deposit Insurance Corporation seized Indymac on Friday, July 11th.

The FDIC says there are 90 more troubled banks out of the 8,500 they insure, but other sources say it’s more like 850 facing certain doom and another 1,200 to 1,300 that are likely to get sucked under

Two more of the walking wounded got picked up Friday after close of business, I learned of this via a note from Ed over at Credit Writedowns, who beat the mighty Bank Implode-O-Meter to the punch on this one.

Like Bear Stearns, like Fannie Mae and Freddie Mac, the FDIC is about to get attached to the U.S. Treasury in a way that will be pitched as a benefit for the common man, but it’s totally Welfare for Wall Street.