Wednesday, July 16, 2008

I wonder what the beginning of the Crash looked like?

I wonder what the beginning of the Great Depression looked like. Not the Crash of 29, I get that. But after the crash it wasn't immediately obvious what the Great Depression looked like. It was a bit of a slow motion depression for a while.
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I wonder, of course, because ... well, the bank failures are ugly, getting uglier and who knows how long they will go on. Inflation is higher than anytime since 1984 - and shows no sign of slowing down (heating oil is going to SUCK this winter). Credit is already tight (see point 1 about banks) so you can't cut back on it that much to stop inflation.
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And we are in an election where the two candidates are tone deaf about the economy. I mean they seem to be talking about yesterday's solutions which didn't even fix yesterday's economy.
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Maybe it is nothing and will blow over (he said whistling into the evening).....

...FYI... This is from Wikipedia. If one was pesimestic one could see parallels with our current situation. However, instead of "mining and manufacturing" substitute "construction and remodeling" as well as a service sector subject to consumer whims (and perceived reality).
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Debt
Debt is seen as one of the causes of the Great Depression. (What follows relates to the USA).
Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher: in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Crowd at New York's American Union Bank during a bank run early in the Great Depression.
Massive layoffs occurred, resulting in unemployment rates of over 25%. (US) Banks which had financed this debt began to fail as debtors defaulted on debt and depositors became worried about their deposits and
began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.

The debt became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.
[8]

Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[8] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.