Re: America in a " depression"
- From: Tsong <plum_village@xxxxxxxxxxx>
- Date: Wed, 11 Nov 2009 05:57:15 -0800 (PST)
On Nov 10, 5:20 pm, hmong <zajl...@xxxxxxxxx> wrote:
Nej xav licas!
America is in a depression, and so is the UK.
I hate to say it, but those words spilled from the lips of my lunching
companion, the brilliant Stephen Lewis from Monument securities, and
frankly I agree. This is what he had to say:
“Depression is a prolonged period of sub-optimal economic activity in
which policy measures are ineffective in improving performance on a
substantial basis and based on this, then the USA is in depression”
Well in the light of the awful double-digit US unemployment figure
that came recently (10.2%) this idea is not so inconceivable.
So what does this mean for America?
Well it would mean that for the next year or two, it will not feel
like much for a recovery but more of a recession. Moreover, there is
no doubting that unemployment still has a long way to go before
peaking. I am guessing that it might hit 12%.
So, the hard grind of this depression still hasn’t elapsed, and the
tender but reassuring “ green shoots” in the real economy, might only
take hold for real by August 2010. Even then, it will take a few good
years before things can ever go back to “normal”.
So why were the policy measures and the huge fiscal stimulus not
adequate enough to stop the unemployment haemorrhage?
Well, in blunt terms, the fiscal stimulus was not big enough.
Something that the Nobel Prize winning economist, Paul Krugman, said a
while back. More money was needed to be thrown at the economy, to get
people back in employment, and support the jobless.
Moreover, and more crucially, the design of the bailout strategy put
the interest of an elite core of bankers before that of the taxpayer.
Hence, it was really a stimulus and bailout package aimed at saving
the banks.
That goal has been achieved in spectacular style. So in this sense, it
has been overwhelmingly successful. But for the average Joe it has
been a botched and irresponsible disaster.
Geithner and co., at the time of designing their strategy, had argued
that by giving money to the banks, this would allow them to start
lending to the economy, i.e. the good old “ trickle” down effect would
take hold. But that's something I argued vehemently against in my
column in June. The “ trickle down” effect is a defunct economic
theory.
The reason why the banks were in no way going to start lending to us
again was plain and obvious to us all. They were insolvent, and should
have been totally killed off or nationalised.
Geithner and co, conveniently in my opinion, argued that the banks
were facing a liquidity rather than a solvency crisis. A liquidity
crisis means that the banks, are just facing a credit shortage. So,
the argument goes, that as soon as they get some cash their way, they
would start lending to the wider community, i.e. to us!
That was the excuse I believe they used to justify their banking
bailout strategy.
A solvency crisis, however, means that the assets of many banks are
worth less than their debt, which meant that whatever money you threw
at them would in no way “ trickle” down to us. This is because banks
would use it to plug the huge holes in their balance sheets. i.e. no
money would come the way of the taxpayer in the shape of increased
lending. And that’s exactly what the situation is right now - banks
haven’t started lending again, and they will not in the near future.
The British and American administrations refused to accept that their
banks were insolvent, because admitting that would have meant that
they would have needed to nationalise the banks.
The banks and the banking lobby wouldn’t have allowed that to happen.
Hence, the governments wouldn’t have allowed it to happen.
As Roger Bootle, my guest on this week’s show, said, “our leaders are
in the pockets of the banks”. Amazing words to be uttered by a man who
has made a career and a brilliant reputation of coming at his
economics from the right. Odd how it is that left leaning and right
leaning economists seem to agree over this banking fiasco and their
abuse of power.
Nationalising the banks would have been better for the taxpayer. As
nationalised, or “public”, banks, the government could have steered
these banks to serve the public and the public interest, by providing
credit to taxpayers, at low interests rate. They would have served our
interest, and this would also have applied to remunerations (so no
obscene bonuses again rewarding excessive risk taking). It’s that
simple.
Moreover, this would have meant that this would have been the start of
us making the financial sector the servant, and not the master, of the
economy. We could have harnessed its power to serve the needs of
industry, and in particular green technologies that would create jobs
and reduce toxic emissions all at once.
Instead, the Obama administration, and that of Great Britain, favoured
a bailing out strategy that favoured the banks. And hence, here we
are with a rising unemployment rate in America, the highest in almost
27 years. It could have been prevented.
The crucial thing is that we can stop this unemployment haemorrhage. A
bigger stimulus package, and breaking up the “too big to fail banks”
would do it.
That, though, requires political will that is non-existent on either
side of the Atlantic, as it would entail taking on the banks and their
power. And I think this is not likely. It is only likely if this
depression deepens, and the taxpayer himself and herself takes it upon
themselves to change the status quo.
Nothing short of a revolution will change this. I hate to say it, but
right now that might be only way to stop this sorry state of affairs.
I think Depression is much worst than Recession, we are in the worst
economic times since the Great Depression but I don't think it is as
bad as what the country experienced in the 1930s.
We have the poor, but we don't see as much as soup lines and during
the depression, many went from places like Minnesota and Oklahoma to
find jobs in the farm fields of California (Grapes of Wrath), it isn't
that bad, but it is very bad and unemployment may actually be a lot
worst than what is said in the newsmedia.
I have thought of this issue before. Good posting.
Also, I may be wrong as far as what your expert says because that
makes sense what he says:
“Depression is a prolonged period of sub-optimal economic activity in
which policy measures are ineffective in improving performance on a
substantial basis and based on this, then the USA is in depression."
.
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