Bernanke calls recession "likely over"

[abskebabs]

There's two questions I've asked you over and over and over which you've never answered me directly on. You seem to like to go off on tangents.

 

1) Do you think if no government action was taken following the failure of Lehman Brothers that it would've lead to a collapse of the worldwide financial system?

 

2) (answer only if "yes" is your answer to #1) Do you think the resulting collapse would be a good thing because it provides the necessary "corrections" to the market?

 

Call me crazy, but I think propping up a corrupt system with government money is preferable to a collapse. I'll call you crazy for preferring a collapse.

 

1) Depends how you define the world financial system. If you mean all types of banks and financial intermediaries worldwide, then the simple answer is no. I don't deny a lot of banks would have suffered, especially those most leveraged and adjusted to such an artificially high supply of credit backed by low real savings. However, their clearing and the clearing of their assets through an honest insolvency process from the system, would have been a necessary correction.

 

Call me whatever you like, you can stay assured your dollar backed assets are safe and drink as much coolaid as you like.

[bascule]

So just to confirm, your solution would've been "let it collapse"...

 

...what do you think the effect on the economy and the day-to-day lives of your average person would be were this allowed to happen?

[abskebabs]

what do you think the effect on the economy and the day-to-day lives of your average person would be were this allowed to happen?

 

A mixed bag. There would have been temporary unemployment in the mal-invested sectors, but on the positive without the Fed massively increasing the money supply there would have been a high degree of deflation, especially in staples benefitting ordinary consumers. The economy would present a real recovery and unemployment figures would begin to fall sustainably as capital is allowed to be allocated more productively, and as savings are allowed to build up.

 

At the moment the prospects look to be long term unemployment, stagnation and possibly even stagflation, as capital is still unproductively allocated, and even capital consumption is occuring with idiotic schemes like cash for clunkers!

[bascule]

A mixed bag. There would have been temporary unemployment in the mal-invested sectors, but on the positive without the Fed massively increasing the money supply there would have been a high degree of deflation, especially in staples benefitting ordinary consumers. The economy would present a real recovery and unemployment figures would begin to fall sustainably as capital is allowed to be allocated more productively, and as savings are allowed to build up.

 

And what's your timeline for this? 10 years? 20 years? What happens in the interim?

[abskebabs]

And what's your timeline for this? 10 years? 20 years? What happens in the interim?

 

I'd say about 1-2 years. Read up on the 1921 depression, and what was done by Warren Harding's administration at the time for reference. Again, the link I supplied by Tom Woods is a great place to start:

http://www.firstprinciplesjournal.com/articles.aspx?article=1322&loc=fs

 

Given how much a REAL recovery has been hampered politically however, I'd say the US will not recover for at least about a decade, unless serious political change is made.

[iNow]

Your argument is basically that if we prevented businesses from borrowing for several years... if we let their manufacturing stop... killing their suppliers and laying off their employees... and if we prevented people from paying their bills for several years so their creditors also failed... and so they too would layoff their employees furthering this self-propagating/cascading set of failures... and if we allowed consumption and production to fall nearly to zero for more than 98% of the population... that, as a result, employment would have gone up and the depression would have ended within 1-2 years?

 

That doesn't make any sense. It dismisses too many of the connections in the system, and glosses over the real-world impact of demolishing the existing system and killing the major players in just a few short weeks.

 

We can't even rebuild the World Trade Center after 8 years, and you're arguing that a mass extinction event of all of the world economies and major players in banking would only have a negative effect lasting for 1?

 

I'm sorry. I'm not drinking that particular brand of kool-aid.

[bascule]

I'd say about 1-2 years. Read up on the 1921 depression, and what was done by Warren Harding's administration at the time for reference. Again, the link I supplied by Tom Woods is a great place to start:

http://www.firstprinciplesjournal.com/articles.aspx?article=1322&loc=fs

 

That article claims:

 

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent.

 

Wikipedia claims for the GNP:

 

http://en.wikipedia.org/wiki/1921_recession#Causes

 

The U.S. Department of Commerce estimates GNP declined 6.9%, Nathan Balke and Robert J. Gordon estimate a decline of 3.5%, and Christina Romer estimates a decline of 2.4%.

 

Regarding unemployment figures:

 

Unemployment rose sharply during the recession. Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. Both agree that unemployment quickly fell after the recession, and by 1923 had returned to a level consistent with full employment.[7]

 

Additionally:

 

The recession of 1920–21 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation.

 

So a cursory examination of the figures purported by your source show them to be gross overestimates, and the underlying events behind it being substantially, almost diametrically different from our own crisis.

 

I'm not sure why the comparison to our present situation is applicable.

[abskebabs]

That article claims:

 

 

 

Wikipedia claims for the GNP:

 

http://en.wikipedia.org/wiki/1921_recession#Causes

 

 

 

Regarding unemployment figures:

 

 

 

Additionally:

 

 

 

So a cursory examination of the figures purported by your source show them to be gross overestimates, and the underlying events behind it being substantially, almost diametrically different from our own crisis.

 

I'm not sure why the comparison to our present situation is applicable.

 

I'm not sure what's so wrong, as the Wikipedia article said estimates vary and it certainly does not show all of them. Also, Woods' work on the subject is more recent so it may well be he has accounted for things others have missed or not accounted for.

 

He's also not that far off on employment from Stanley-Lebrott so I'm not sure what you're beef is there.

 

Also your claim that the causes are different is only true on a superficial basis. It is an example of another malinvestment boom fuelled by credit creation and inflationary monetary policy carried out by the Fed, albeit it affected different sectors. This is to be expected however.