The New Depression

Economists dont have an exact quantitative definition of a depression. Wikipedia tells us that:

"In economics, a depression is a term commonly used for a sustained downturn in the economy. It is more severe than a recession (which is seen as a normal downturn in the business cycle). Considered a rare but extreme form of recession, the start of a depression is characterized by unusual increases in unemployment, restriction of credit, shrinking output and investment, price deflation or hyperinflation, numerous bankruptcies, reduced amounts of trade and commerce, as well as violent currency devaluations."

Now, on top of Bear Sterns going under, the price of gas being $5, unemplyment being way up, consumer spending way down, housing prices falling faster than they were during the Great Depression, and The Fed loaning out money hand-over-fist just to keep the scaffolding in place, we have this:

The New York Times September 15 2008

"In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, said it would seek bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

'My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,' said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration."

To be honest, Im quite afraid for our country right now. The purpose of this blog is not to spread fear, or make the situation out to be worse than it is. There are many economists who will tell you that a depression on the scale of what happened 80 years ago is impossible. But what Im seeing is nothing like what happened when the stock market crashed in 1988. People werent sleeping in their cars and living on Spam. Truckers didnt sell their rigs because it was impossible to make a living anymore. Companies and investors lost money, but the banks didnt close and people didnt lose the shirts off their backs. This time, its definitely different.

The real origin of the problem is ideological. It's rooted in the prevailing "trickle down" orthodoxy which opposes any increases in wages or benefits for working people. Just look at the minimum wage - its worthelss in todays economy. Middle class families cant afford to own the homes they live in and and rent, and the lower class are barely scraping by. Henry Ford realized what today's captains of industry and finance refuse to accept; that if workers aren't adequately paid for their labor---and wages do not keep pace with production---then the economy cannot grow because consumers do not have the money to buy the things they make. It's just that simple.

Greenspan and his ilk believed that they could prosecute the class war and make up the difference by relaxing lending standards, changing bankruptcy laws, and by creating a nearly endless array of exotic financial products that expanded credit. But shifting wealth from one class to another has its costs. By crushing the worker they have killed the golden goose. The world's most prosperous consumer society is in terminal distress and no amount of "free market" economics will keep it from crashing.

The idealogical problems can only be solved through true leadership - all the way from the top. Does Obama have what it takes to turn our economy and our country around? I'm hopeful, although I dont know for sure, but I do know that John McCain supported the fiscal policies and tax cuts for the rich enacted under the Bush administration, from which we are all currently hurting.