Are we going to have another Depression?

I don't even know what a depression would mean.

Higher gas prices?

Higher food prices?

Will there be a domino effect - i.e., as people's jobs and income dries up, they have no money for fast food, which means those places shut down and lay off people, which means ...

Is this a death-knell for places like Starbucks? Are they the places that go first?

Do home computer and HDTV sales plummet?

I guess I could ask my parents, since they went through one, but things are so different today.

Do we even want to dwell on this?

I understand that the Soviet government fell partly (or largely) because Reagan deliberately and intentionally and purposefully upped the arms race, and the CCCP went broke and collapsed, as Reagan had anticipated.

Will Iraq and the bank collapse cause something similar to happen here?

I don't agree. I could be wrong, but let's not become Chicken Little. I mean, the stock market crash of 1987 was the worst. Then we had BCCI and several hundred year old bank went under in days. Also, many banks went under in the early 1990's in a matter of days. Bear Sterns made poor choices, they failed. It doesn't mean we are heading for a depression. The factors that lead to the depression, just aren't evident today. For one thing, we had very protectionist policies back then and Hoover raised taxes. It may be tough, but let's not start jumping out windows quite yet.

Martin Feldstein (Reagans old economic adviser) thinks it might be pretty bad also. Mankiw's blog has good stuff if you are interested. Bernanke has set up a firewall against future bank runs which may help but we still dont know how much bad debt is out there. If housing prices continue to drop we will have more bad debt. A positive feedback loop. This is not a bubble popping but more of a credit crisis which has implications I dont fully understand.

Our high level of pre-existing debt and the weakening dollar are complicating worries. This purchase of BS since its really backed by the Fed may be seen as a bailout and if it causes a run on other banks it could get scary. One more bad thing like an interruption in oil might lead to panic. Ill start dumping my gold and shorts as soon as we have one more big sell-off since it doesnt seem other market fundamentals are so bad.

Steve

Whenever central-bankers lose anchors and The Marketeers find it's time to say goodbye to all their company in singing as their adopted closing theme that three-'nanke weepy, "Benny and the Debts", you can count on James Grant, a credit to his profession of writing on borrowed time, a loan ranger with a silver pen whose word is as good as his bond, to show a proper interest in providing a balanced sheet calling to account the liquid assets of our sinking financial sub-Marines amid cries of Semper Fiduciary!* Here he is in yesterday's Washington Post ("A Bear Stearns Market"):

*[Block that metaphor! - The New Yorker.]

washingtonpost.com/wp-dyn/content/article/2008/03/14/AR2008031403318.html

"The same carefree lending standards that led to record-high home foreclosures have brought deepening troubles in the market for loans to highly indebted companies. The 'no-doc,' interest-only, no-money-down mortgage turns out to have been a kind of universal American business model.

"It wouldn't be so bad if the United States were not the issuer of the world's reserve currency. The dollar is not only America's scrip but also a store of value and a medium of exchange in Asia, South America and the Middle East. Yet -- and here is the rub -- the Federal Reserve makes monetary policy for one country only.

"Back in 2002-03, Ben S. Bernanke, then a Fed governor serving under Alan Greenspan, got it into his head to scotch "deflation." Low, and lower, everyday prices were a clear and present danger, he claimed. Concurring, Greenspan led a campaign to reinstitute a decent rate of inflation by slashing the federal funds rate to 1 percent. Wall Street did not need to be told twice what glorious vistas for moneymaking such rock-bottom borrowing costs opened up, and it set to work creating junk bonds, mortgage-backed securities, leveraged bank loans and the rest. Naturally, real estate prices took flight.

"Lenders and borrowers are forever prone to overdo it, then to underdo it. One day, anybody can get a loan. Next thing you know, the chairman of Countrywide Financial is explaining himself before a hostile congressional committee and the formerly carefree credit markets are in tears. The tears are all the more bitter today because the world is losing faith in the paper dollar.

"Americans enjoy the inestimable privilege of consuming much more than they produce and financing the difference with the currency they alone can lawfully print. The reports about the record-high euro or the post-1995-high yen mean that we privileged ones will soon have to start spending less and working more..."

well, since it can't be a worse option than any of the other candidates, and there's no stopping a recession, let me pose a new candidate who we (as Americans, we do this better than anyone) can blame for our problems: ELECT BRETT FAVRE! 4 for prez...that's the way to go. Okay, it's satire, but seriously, none of the other schmucks running have any clue, and all are pretty much worthless in the economic and other areas, so why not?

May I ask why its such a tragedy that Bear Stearns failed? When they were making it did they hand out some cash to you?

When the Asian financial crisis hit us in Singapore in 1997-99 housing prices fell between 30-50%. A lot of us here lost a significant part of our savings. But we are still here. This too will pass; the takeaway lesson is never use the only house that you have to speculate for a retirement nest-egg. All over the world people are stressed out realising that in this globalised world the average working-man is looking at a long ride up the river with a short paddle. It is not purely an American thing. And I would argue that the Americans are better placed than most to wear out the ill effects with their strength in agriculture and raw materials.

I have an Ivy League background (in economics and Japanese) and worked for the CIA in the 1990s analyzing what when wrong with the Japanese markets. Even though I know the economics of these things like the back of my hand, I shy away from entering into these discussions because the amount of disinformation and ignorance of basic economics is nearly universal, especially on "investor" forums. And then you have the "professional economists" working for politicians and investment bankers, meat puppets all of them, kicking up as much dust as possible. But I like you people and hope I can clarify some things. God, this difficult to do in a combox but here goes...

First, we are clearly going to have a deflationary depression. I cannot emphasize this enough. Deflation and inflation are directly related to money supply, and money supply in the form of credit is being rapidly destroyed. Even if the Fed were to "print money", it could not replace the trillions of dollars that have been, are being, and will be destroyed in the credit market meltdown. Think supply and demand. The amount of "stuff" will remain constant while the amount of money on hand is rapidly declining. So "cash is king". Put all your money in the bank, but do not exceed the FDIC limit of 100K at any one bank, or put some of your money in a Treasury Only money market fund with low expenses such as Vanguard's VMPXX because interest rates are going to be close to zero for decades. I don't want to give you the impression that this is the end of the world. Just play it safe until this storm is over. For the time being, the rule of the game is to lose less money than anyone else.

Second, many people believe the Fed is going to "hyperinflate" and "destroy the US dollar" so they are rushing into commodities such as oil, gold and other currencies as an "inflation hedge". I cannot emphasize enough that this theory does not pass muster in terms of economic theory. These markets have been going parabolic, so stay away! They will correct, and correct badly! All of the inflationary pressures and speculation in commodities will be gone within the next few (OK, maybe several) months. This is because the economy is too weak for a wage-price spiral to get set off. If prices for commodities get too high, demand will plunge and the hyperinflation game will be exposed for the ruse that it is. The dollar will even rally against the euro (but not the yen and yuan), not because the dollar is great but because the Eurozone will begin to experience problems similar to the USA (a collapsing real estate market being just one of these problems). Gold may be immune to all this, I'll grant the gold bugs that, but I am not willing to bet on this.

I have the flu and a lot of work to do today, but this is important stuff. I'll check back to argue with anyone who's up to it (unless the flu gets the better of me). There are a lot of people out there who have quasi-religious views on economics, usually revolving around gold and the evil Fed. (OK, I believe the part about the evil Fed.) But the hyperinflation argument is about a bogus as they come. And don't point to these hyperbolic markets as "proof" that you are right. They only indicate current market sentiment. Remember, it wasn't too long ago that people were pointing out the same damn stuff to me about housing prices going up forever.

I've got to lie down people. I like you all, even though you can get a tad sanctimonious at times, and I really want to help. If you at least understand in broad outlines what is coming down the road, you'll be in better shape than most.

Let's remember that the economic downturn that followed the 1929 stock market crash need not have been catastrophic. Three basic policy blunders turned what should have been a serious but short term downturn in the financial markets into the "Great Depression:"

1. The Smooot-Hawley tarrif of 1930, which snuffed out global trade at the time the economy needed it most.

2. The inability of both the Hoover and Roosevelt Administrations to recognize the problem of deflation. Hoover actually spent three years fretting about inflation, the opposite of the problem facing the country.

3. The ideological assumption by both Hoover and Roosevelt that the economy could be managed and directed by "experts." Hoover the Wonder Boy Engineer harangued businesses to keep wages artificially high and encouraged states to fund massive public works projects. FDR created the disastrous National Recovery Administration, which prolonged and deepened the Depression by trying to regulate prices and wages. Both Hoover and FDR pursued balanced Federal budgets regardless of cost. Roosevelt insanely pushed for tax increases in the bleakest years of the Depression (1937-1938).

The Crash of 1929 was bad. But the markets weren't responsible for the quarter of Americans who were out of work 8 years later (during FDR's second term). Blame for that lies squarely with policies coming out of Washington.

I think this is a bigger deal than Obama's pastor. If bear stearns is in this much trouble than the economy looks bleak.

I for one am thankful that margin trading with only 10% down isn't allowed anymore. I think we are looking at a recession similar to the early 80s rather than a depression.

Even so there is pain ahead.

I think this is a bigger deal than Obama's pastor. If bear stearns is in this much trouble than the economy looks bleak.

I for one am thankful that margin trading with only 10% down isn't allowed anymore. I think we are looking at a recession similar to the early 80s rather than a depression.

Even so there is pain ahead.

Neo --

We're in this mess precisely because of margin trading! Hedge funds are leveraged up to 30-to-1 on some of their trades! And "homeowners" have been taking out loans seven or eight times the size of their annual income (3-to-1 used to be the rule, give or take) to speculate on rising real estate prices using interest-only no-doc (just lie about your income) adjustable rate loans at the lowest interest rates in a lifetime! (Traditionally, ARMs were used if there was a belief that interest rates would fall over the course of the introductory period and only the most credit-worthy and market-savvy players could even get these loans.) If that's not margin trading, I'd like to know what is.

Bear Stearns didn't fall apart in a week. Bear Stearns may *claim* they fell apart in a week. But most likely they've been carrying bad debt and the reporting caught up with them. The FED brokered a deal.

Repeat that a few times. The FED brokered a deal. Translation: Many people knew about this crash well ahead of Friday's close. And if it hasn't already been mentioned. Bear Stearns is the Banker to some of the largest banks in the country. The big question then should be
"Are those huge institutions defaulting, modifying, what's really going on?"

Just another reason why I don't trust the Stock Market. I don't think it's the end of the world. I've seen plenty of banks colapse and jobs disappear. What really worries me are the seemingly unending rises in energy prices and the monetary cost of the war in Iraq.

Everyone is talking platitudes and ethical responsibilities. But what if we as a nation just simply *can't afford* to contine in this War? What if there are financial limits?

A little off topic, I have to say I was heartened to see John McCain in Iraq, along with Joe Lieberman. And then to see Cheney in there today. I'm sensing that as much as is possible, John is starting NOW to get things moving towards a resolution. That would be outstanding.

Oh, and canned goods are a bad idea, at least as far as vegetables are concerned. Very low nutritional-content-to-water ratio. Go with dry goods--beans, peas, flour, etc.

S.V. Steve --

I think you're a bit too optimistic about JP Morgan Chase, but you're spot on about Japan. The idea that Japan and China are free market economies is laughable. We all remember how Japan was going to rule the world. Didn't happen. Now watch as the Chinese paper tiger gets shredded. That has to be the. most. disfunctional. economy. in. the. world.

Bear Stearns didn't fall apart in a week. Bear Stearns may *claim* they fell apart in a week. But most likely they've been carrying bad debt and the reporting caught up with them.

I know, I didn't mean that literally. I mean that the *image* of BS collapsed in a matter of days, which meant that BS collapsed. That is, this time last week most people thought BS was suffering from problems, but was basically solid. Until suddenly it wasn't. That's scary.

"There may be many serious objections to the war in Iraq. A monetary cost of $12 billion per month is not one of them. Not in a $14 trillion economy."

No. The monetary cost is most certainly a serious objection, second only to the moral objection. As we're starting to see now, our "$14 trillion economy" is really not that different from Bear Stearns, it's grossly overvalued, maybe by as much as 80% And you 'misunderestimate' the present and future costs of the occupation of Iraq in a conveniently myopic way.

The money we've already wasted in Iraq, and the trillions we will apparently waste for decades to come, could work wonders right here at home.

it's grossly overvalued, maybe by as much as 80%

Dude, breathe slowly. If our GDP is really just $2.8 trillion, we've got way bigger problems than Iraq. That would mean per capita annual income would be less than 10K. At that level, Sao Paulo favellas would look like McMansionvilles by comparison. Get a grip.

"Get a grip."

Let's all have a grip or two. To blithely state "$14 trillion economy" is still an gross over-statement. A big part of that $14 trillion is essentially the noise of drop-outs selling each other burgers, cell phones and tattoos. Another big part is derivatives, paper, and other funny money based on the imaginary value of starter castles in upper suburbia. Big chunks of the rest go to service the staggering real debt. And the value of the dollar drops a little every day.

The point is, Iraq is, and will be, an enormous economic and moral deficit for the US, regardless of how you value the US economy.

Anybody know where Cheney puts HIS money?
Unless you are in the very top tier get ready for radical change (if your in the that top tier you are not reading this.)
Hope you have silver and gold.
The United States has been playing money monopoly for SO long why now do we start discussing It?
Years, yes years late and a dollar short (or would that be a euro.)
Our infarastructure is held up by a toothpick.
This is going to make the 1929 DEpression look easy.
We are cooked, fried.
We will no longer have to watch the news to see third world country
atrocities we are going to live them. Racism, hate crimes, neighbor against neighbor, social chaos, etc. will be our world. Will Christianity hold up against Darwinism?
Let's pray so.

Seems to me that reality is catching up to wishful thinking, denial, and lies. It had to happen eventually.

Simon, you're correct. We need to make sure we don't make the same mistakes that we made trying to recover from the Depression.

1. The Smooot-Hawley tarrif of 1930, which snuffed out global trade at the time the economy needed it most.

I honestly don't know much about this, but I think it's a mistake to generalize there. Tariffs then were to protect American companies from international ones, but what they would do now, and why I think we need them now, is to protect Americans from 'American companies' using labor outside this country, which is the last thing we need in a recession.

2. The inability of both the Hoover and Roosevelt Administrations to recognize the problem of deflation. Hoover actually spent three years fretting about inflation, the opposite of the problem facing the country.

Neither of those is actually the problem, but yes, they got it backwards. The problem is the lack of money, of which deflation is a sign. We need to 'undo' this credit crunch, probably by printing more money. Which will also undo deflation, but the real point is that the money supply and the economy tend to match, so if we let the money supply shrink, the economy will blithely follow.

3. The ideological assumption by both Hoover and Roosevelt that the economy could be managed and directed by "experts." Hoover the Wonder Boy Engineer harangued businesses to keep wages artificially high and encouraged states to fund massive public works projects. FDR created the disastrous National Recovery Administration, which prolonged and deepened the Depression by trying to regulate prices and wages. Both Hoover and FDR pursued balanced Federal budgets regardless of cost. Roosevelt insanely pushed for tax increases in the bleakest years of the Depression (1937-1938).

Wage and price controls are, indeed, very stupid.

And a recession is the stupidest time to have a balanced budget, which is why out-of-control Bush spending has really hurt us, because we may not have a lot of choice there.

But you're wrong about the public works thing. Public works is what actually ended the Depression, although we like to refer to these public works as 'World War II'. It's just we were willing to finance it with debt (aka, war bonds) and drafted labor, instead of with a balanced budget, which didn't have any money.

the 2nd usa depression will teach people to save and i will buy their stuff for pennies on the dollar or amero

Retired at 27 (yea I bet) you misanthrope. I lay money you are one of the invaders that help destroy our economy. Sending all your money back to that stink hole of a country methico.