it's official: depression just ahead...

[sniglet]

The US government's decision to step in and acquire hundreds of billions of dollars worth of bad loans at above market prices pretty much guarantees that what was already looking like a dismal economic future will be an out and out disaster. I do not use the word lightly, when I describe the virtually certain outcome as a depression.

As much as policy makers have attempted to avoid repeating the mistakes of the past (e.g. Messr Bernanke is an expert on the '30s depression) they have wound up following the script of past catastrophes to a T. Just as Hoover and FDR fell over themselves to attempt to bail-out the economy as dark clouds mounted, the global governments are doing the same thing today. In the feverish effort to stop the immediate pain, we are actually making it increasingly harder to come out the other side.

Not only have we not learned the lessons from the Great Depression, but we haven't even learned the lessons from the .com bust of 2001/2002. Recall that in order to avoid a significant recession the Federal Reserve dropped interest rates to historic lows, and pumped masses of short-term liquidity into the financial system. The policy makers succeeded in preventing any serious economic contraction but wound up blowing another bubble into the real-estate and M&A sector --the mess of which we are dealing with now. What Bernanke et all failed to realize in their studies of the past is that when the apocalypse is staring you in the face, policy makers will always cave-in and try and attempt to bail things out. The only real choices occur in the decades before the crisis hits.

The irony is that every bail-out and intervention merely drives more good money out of the system, ensuring that more bail-outs will be needed. Every government subsidy, or bail-out, makes it that much harder for the private sector to be profitable on its own. Who would want to get a 30 year fixed mortgage from the private sector at 12% when they can get a government guaranteed loan for 5.5%?

There are so many bail-outs and interventions under way that I don't even know where to start, and I am sure this is only the beginning. To take just one bone-headed idea, let's look at the decision to ban short sales of financial stocks. This is tantamount to killing all the "repulsive" carrion beasts to prevent them from dis-respecting the deceased. Unfortunately, the dead animals are still with us and will just take MUCH longer to finally rot away. This is just another superb example of how the desire to stop short-term pain only makes things more dire.

Perhaps the most maddening thing of all this is how utterly ambivalent the public is to all of this. Hardly any voices are raised in protest. Expert after expert chimes in with agreement that all these interventions are simply "necessary", albeit regrettable. Does no one realize that all of these interventions come at the price of shackling the global economy in even more red-tape and regulation? The politicians will want their pound of flesh in return for their help, in the form of extensive (and muscular) new regulatory regimes that will hold back economic growth for decades. Even the Wall Street financiers who ought to know better are begging for government help in their hour of need.

It's like some medieval village that begs a Knight to defend them from a barbarian horde headed towards their town. The knight and his pals may well defend the town, preventing mass rape, looting, and death. The price, however, is that the goodly Knight will henceforth treat the villagers as his chattel, forever taking away their freedom. Sometimes rape and pillage is preferable to the cost of temporary salvation.

Yes, the governments of the world might succeed in delaying the onset of severe economic distress through their interventions, but they will ultimately push us even deeper into a long, dark, abyss. It would be far better to allow the real pain to be felt through the economy now, thereby allowing it to start recovering quickly thereafter.

[Markor]

Great post, sniglet. I'm for more regulation of the financial markets so that a hedge fund or an insurance company can't hold the whole economy hostage. I just don't think the policy should be slapped together in a week, or that anyone or any company that brought themselves to the brink of financial disaster should be rewarded with a bailout.

I agree on your depression prediction. It's a safe bet now. I second your thoughts on the public's ambivalence. They'll pay the price for that, and then they'll be wise for a while until a future generation has no memory of it.

[sniglet]

[Markor]

I agree that some types of gov't intervention / regulation are bad. But with no regulation, what's to stop a hedge fund from leveraging 100X, to the tune of $trillions, so they become too big to be allowed to fail?

[SeattleMoose]

Our financial system is like a bunch of dying junkies juicin each other to the end....

[sniglet]

[Robroy]

This is the scariest thing I've read in my entire life:

http://www.nytimes.com/2008/09/20/washi ... SYsRms//ig

[Robroy]

Governments current action "for dummies":

http://www.minyanville.com/articles/sho ... ex/a/19076

[Markor]

[Robroy]

Well, maybe it's a tossup. This is pretty scary too.
http://www.minyanville.com/articles/gol ... ex/a/19081

[Markor]

[explorer]

Agree with Markor on this one. Remember that Insurance compainies and banks are exempt from anti-trust laws. Maybe it's time to repeal that early 20th century compromise. Maybe it's time to look at the usefulness of the Federal Reserve too.

The free market was always a myth, and no matter how many times this is proven, some still believe the ideology over the reality. Many of them even suffer for it, but think they benefit. It's a Bizzaro world out there.

[Lake Hills Renter]

It's just a matter of time before a huge housing bailout follows the huge financials bailout.

[Lake Hills Renter]