The Coming Depression

Let me begin by saying that it is my fervent hope that I am entirely wrong about what follows. I fear that the opposite is true, though, which is why I’m writing it now.

We must wait two more months before the Democrats take power, and the Bush Administration appears at this point to be actually working to harm the economy during these eight fatal weeks.

The primary mechanism it has chosen is to stop using the TARP package voted by congress on the theory that the banks won’t spend the money as intended, and under no circumstances must any action be taken that helps distressed homeowners directly. The money is there for the use of corporations, not ordinary people. Our money, incidentally, given that the vastly greater share of American tax revenue comes from private individuals, not companies.

The foreclosure situation, however, is becoming absolutely dire, so much so that Freddy Mac and Fanny Mae have taken the intelligent and essential step of placing a moratorium on foreclosures, essentially until new leadership takes over.

The problem with foreclosures is that they not only destroy the value of the houses that are abandoned, but also make it far more difficult to sell other houses nearby. Foreclosure is treated by the right wing as a punishment for being irresponsible, but it is hardly that when half a million Americans a month are losing once-secure jobs through no fault of their own.

At the rate we are going, we will be pushing through a nine percent unemployment rate by March, and if the auto companies have ceased to exist, it will be closer to twelve percent and growing rapidly. The closing of Chrysler and GM will ultimately affect ten percent of all jobs in this country, and if Ford goes, it’s even more.

Letting those companies die, which is what the Bush Administration is also trying to do by refusing to allow any part of the TARP package to be used to assist them, is the equivalent of bombing the American heartland, and, in fact, in a year or two those great factories that are part of the very bone structure of this nation will look just like bombed out ruins.

The fantasy that we can let the America automobile industry die and still survive as a coherent economy has taken hold in the media, egged on by Administration spin experts. If you listen to talk radio, you hear supposed conservatives shrieking about how the CEOs went to Washington in their private jets, and how dare they if they want any money from us!

What extraordinary stupidity to focus on a concern as trivial as that when the welfare of every man woman and child in America is at stake in what is, in fact, the worst economic crisis this country has faced in its history.

The collapse of the automobile industry will lead to a disaster not only worse than the great depression, but MUCH worse. There is not a single person reading these words who won’t be directly affected, and a good number of you will end up without an income and perhaps without even a place to live because of it, even if your place in the economy seems far removed from the auto industry.

Yes, it is that serious, and don’t let any lying ideologues from either extreme tell you any different. Right wing extremists, now that they have lost power and lost the confidence of the public, WANT the economy to melt down, and especially if it can be made to seem as if it is somebody else’s fault. Rush Limbaugh is already calling it the “Obama Recession.” Could there be a more complete and utter admission of intellectual and moral bankruptcy than a statement like that? It’s as if a little boy threw a rock through a window in full view of his daddy, then shouted, “I didn’t do it.”

The right wing media was listened to. It played a huge role in winning elections for the ideological extremists whose excesses have destroyed our economy, and therefore bears a significant responsibility for the immeasurable destruction we are seeing now, and the suffering that must follow.

And the failure of the auto industry is NOT the fault of the unions, either. The unions gave up cash in their pockets in favor of getting future support from their companies in the form of medical and retirement benefits. They did this back when the automobile companies were profitable. Those profits went into the pockets of shareholders in the form of dividends, while the companies ran up debt to pay the workers their benefits.

In effect, the workers bought bonds in the companies in the form of medical and retirement plans, instead of taking cash out immediately in the form of raises tied to profits. The result? Their investment has become worthless, and now, in addition, they are being blamed!

The blame is systemic. It isn’t that the companies built cars that people didn’t want. It isn’t that they were behind the times. It certainly isn’t that they weren’t price competitive, because they were. You could get a really nice American car, and well built, almost always for less than the Japanese equivalent. And if you want a REAL deal, wander onto a big three auto lot this weekend.

Back in the 1920s, the country’s wealth and business activity exploded as the automobile industry grew. There was absolutely no regulation of any kind. There was no bank insurance. There was no broker insurance. Stocks could be bought for 10% cash and the rest on a loan from the broker. But if the stock dropped more than 10%, you had a margin call, and you had to make up the difference with the broker.

In the summer of 1929 the Federal Reserve was concerned about inflation and it raised interest rates without realizing that business activity was slowing down, because measurement of economic activity was too primitive. The result of this was that the stock market dropped off in September, then, very suddenly, completely collapsed.

At first, the average person did not feel it. It was a frightening news story, much as the “recession” news is now. But it didn’t affect us, unless we were involved in the market, of course.

However, what had really happened was that a vast amount of liquidity had disappeared from the economy when the value of stocks fell. The present decline of the markets worldwide has had the same effect–trillions of dollars of liquidity have ceased to exist. But now, the failure of the mortgage market has made matters far, far worse.

As a result of the lack of liquidity, banks began to fail, then as now.

Then, though, once your bank closed, your money was gone. People would go down to their local bank to make a withdrawal and find it mysteriously closed. Then the bank across town was closed. Then all the banks in town were closed.

Then the lack of credit and the lack of cash caused business to become unable to pay their employees, and by late 1931, people who had been prosperous, who were not in debt, who had saved and worked hard, were suddenly destitute. Nice, conservative middle-class families ended up living in shanty towns or riding the rails. In vast numbers. These shanty towns became known as ‘Hoovervilles’ as they were a direct result of President Hoover’s failure to effectively deal with the catastrophe.

And then came the 1932 election, which was won by FDR in a gigantic landslide. He was a fiscal conservative when he got elected, preaching a return to fiscal responsibility by the elimination of things like excessive margin. By the time he took office, though, circumstances had changed so completely that the centrist believer in a balanced budget had become a Keynesian believer in debt finance.

In those days, a president elected in November did not reach office until the next March, and by March of 1933, what had been a dreadful problem in November of 1932 had become a massive worldwide catastrophe. The New Deal was the result, and it was somewhat effective in that it got people off the breadlines and into some sort of gainful employment. But it was a gingerly, careful program and it never really broke the back of the depression, which lasted until the government began literally pouring money into the economy during World War II.

It was that war spending that returned us to prosperity, not the far smaller New Deal. All it did was save the starving.

To recover this time, we are going to need an absolutely massive program of government spending. But we won’t have one, because this time, we can’t.

The US government went into 1932 with a surplus that was a natural outcome of traditional fiscal conservatism.

But because Bush did not even respect his own ideology, we are going into 2009 with the most massive debt in our history. What’s worse, the countries that usually buy US debt will not be doing so at anything like past rates in 2009. These countries are primarily China and the middle east. But the Chinese economy is collapsing even faster than ours is. Since September, over 70,000 factories have closed in China. And they have virtually no net. It’s like the America of the thirties. When your job ends, you wind up on the street destitute.

Of course, the middle east has seen a catastrophic, unstoppable decline in oil prices. And demand is going to continue to plummet. We will see forty dollar oil soon, and we will see countries like Venezuela, Iran and Nigeria threatened with bankruptcy. Mexico will have to radically curtail public spending and will sink further into chaos. The oil-rich Gulf States, led by Saudi Arabia, will cease to be players on world financial markets.

So, who will buy the trillions of dollars of new American debt that will be needed to get us rolling again?

The terrifying answer, at least as things stand now, is nobody.

In other words, we are, as a country and as a world, busted. The only choice left to us or to any country next year is going to be to create money without taking on equivalent debt. In other words, to survive even for a little while we are going to do the only thing we can, which is to print money. And this is what we will do, mark my words.

What must happen if this is to work is for there to be a new international monetary agreement, with fixed exchange rates. The market in currencies has to end, at least temporarily. But will that happen before certain currencies, most notably the dollar and all of its client currencies, and sterling and its client currencies, collapse?

With the Bush Administration now a proactive force of destruction in the economy, this could happen. Certainly, Henry Paulson’s ceasing to do his job is pointing us in that direction.

We have come off eight years of what is not only the worst presidency in history, but also one of the worst governments in the history of free societies. I cannot think of many that were worse, except perhaps the idiotically wrong-headed Blum government that lost France to the Nazi invasion in 1942. Ironic that, of the two worst governments to run free countries in the past two hundred years, one would have been of the far right, the other of the far left.

Ironic, but not surprising. Ideology is not complex enough to run human societies, which is why all ideologies fail. Why the left failed. Why the right has followed it.

Back in October of 2005 I posted two journal entries back to back, one called “The Failure of the Left” and the other “The Smashed Pillars of Conservatism.” In the latter, there is a statement that is worth looking at again. It was about the danger of ideological government, and the fact that modern societies cannot thrive unless their governments balance economic activity with appropriate regulation. In it, I said this, “What do we actually need? Well, we need to come to our collective senses and abandon the ideologues of both left and right. This country is moderate, fair and free. We don?t need people in public office who are extreme, who are bullies and who distrust the freedom of those who disagree with them. We certainly don?t need to throw out the current far right extremists in favor of equally unpleasant far left extremists.”

This time, we haven’t done that. Judging from the choices he has made so far, Barack Obama plans to do what the electoral map suggests that we want him to do: govern from the center.

Let’s hope that he adds dynamism and courage to thoughtful government, because he is going to need both.

Right after the election, the satirical journal “the Onion” published a headline: “Black Man Given Worst Job in America.”

Too true!

Starting with the philosophy of Ronald Reagan, then legislation in the Clinton era, then the destructive, neglectful stupidity of George W. Bush and the brain-dead ideologues who advised him, we abandoned not only regulation, but also fiscal common sense. The result is that we are right back where we were at the end of the 1920s, and for the same reason: lack of regulation has once again led to market excess and a crash.

But there is a huge and tragic difference this time. Bush not only let the economy self-destruct, he added a vast debt burden at the same time with the Iraq war. So, this time, we are ENTERING our new depression already broke.

Roosevelt had an incredibly valuable tool to work with: the full faith and credit of the United States of America, arguably the most valuable asset ever known to mankind.

Barack Obama, in all probability, will not even have this.

May God be with us.

NOTE: This Journal entry, previously published on our old site, will have any links removed.