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It's 1929 again...Oh, really? Three reasons why the depression analogy is a big lie.

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October 03, 2008 – Comments (1)

Three reasons why it's not.

The cause of the Great Depression is the policy of the Fed, which tightened money supply instead of easing it. The current chairman of the Fed, a scholar of the Great Depression, is known as the Helicopter Ben, and so far he has lived up to his name. A look at the Fed site shows that Ben has been printing money like crazy.

It's a lie that nobody is lending anymore. My credit card companies keep sending me letters offering to take advantage of their loans at the effective rate of 5-7%  Mortgage rates hower around 6%. The reality is that any borrower with good credit is still flooded with offers, and loans are cheaper than they have ever been with the exception of two or three abnormal years at the height of the lending bubble.

The final crucial difference between 1929 and 2008: back then, tightening of the credit meant that Joe Sixpack's house won't be built because Joe's savings alone wouldn't be enough to buy the nesessary number of logs even if the lumber company is operating at a zero profit. This meant the construction workers got laid off, and then the grocer that used to serve the workers went out of business, then the barber that gave hair cuts to the grocer closed shop, etc. In 2008, tightening of the credit means that Joe Sixpack's house can be built just as easily, except that the speculator who sold the lot to Joe's contractor will have to accept a smaller profit, because Joe's contractor, knowing the state of finances of his customer, simply won't offer a higher sum. The expenses that Joe Sixpack was facing in 1929 were not optional: your lumber yard cannot sell you lumber cheaper than what it costs to produce. The expenses Joe is facing in 2008 are mostly optional because your land speculator can settle either for $30,000 or for $300,000, whatever he can successfully charge you for the land. In this environment, the real economy is agnostic as to whether interest rates charged by lenders will rise or fall. The only thing that really depends on interest rates is the amount of blood that mosquitos living off of the real economy can obtain from their host.   

 

1 Comments – Post Your Own

#1) On October 03, 2008 at 2:19 PM, Gemini846 (47.28) wrote:

It's time to start working on a new monetary policy issued by the treasury and not some federal bank. Governmental controls should exist to protect consumers and businesses from fraud.

Money should be spent on financial education. Shiquina should have to sit in Econ 101, Balancing your checkbook 101 and pregnancy prevention class 101 while she collects welfare until she could get a job.

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