From the Wikipedia page on depression (economics):
Today many economists believe that the combination of the social safety net and a much better understanding of macroeconomics makes another Great Depression highly unlikely.
The social safety net is a lie. The much better understanding of macroeconomics is blunted by the sheer complexity of new financial instruments.
If you were on vacation for the past few weeks, you would have returned home to find that the had world changed forever. Two of Wall Street’s oldest investment banks are gone: Lehman Brothers filed for bankruptcy and Merrill Lynch was forced to sell itself to Bank of America. 80% of AIG, one of the largest insurance firms in the world, is now owned by the U.S. government after an $85 billion buyout. AmeriBank became the 11th bank to fail this year (14th since the mortgage crisis began). Central banks around the world struggled to rein in the skyrocketing cost of borrowing money in an attempt to prevent other firms from collapsing. To end the week, President Bush, the “compassionate conservative”, asked Congress to approve of a $700 billion bailout plan that would buy all the bad assets held by financial firms.
What was thought to be unlikely became possible and imminent. We were overlooking a 1929-sized fall and all subsequent ramifications.
To be honest, I was really scared this past week. From what little I understand, I think I’ve been able to connect enough dots to see the big picture. Seeing people worried about whether or not they’ll be able to salvage their savings accounts if—for example—Washington Mutual collapses was quaint. My worry was that the financial system as a whole would collapse and paper currency would become worthless overnight. Yes, I am finally grasping this possibility (or probability!) that Lloyd warned me about years ago. But I see it and feel it now.
As shown in the chart above, the stock market fully recovered from the fall this week. But don’t be fooled: the troubles are far from over. There is still much more bad debt and bad bets to be aired; and there is the issue of saddling taxpayers with another trillion-dollar liability.
I hope you will all keep tabs on all this. Just like how the current presidential election has drawn young people into political discussions, I hope this crisis will draw young people into discussions about economics and the workings of our financial system.
Lloyd
I really hate sounding grim, but the need for (our) preparedness and reality dictate that certain facts be plainly highlighted.
(1) The move by the Feds is a *panicked* one; however, they really didn’t have any good choices. But acquiring all these mortgage-backed derivatives from these failing banks–which are precisely the toxic element that’s causing these banks to fail in the first place is a terrible idea. Think throwing good money after bad. Worse, it’s *our* money that’s bailing out these banks (the bankers and investors themselves get off almost scot-free but that’s another story).
(2) The bailout only scratches the surface: there are still TRILLIONS of ‘weapons of mass destruction’ derivatives (as Warren Buffett puts it) floating around the global financial system. These derivatives are backed not by now increasingly-worthless American real estate by now-worthless corporate, government, credit card and car loan bonds.
(3) Finally, the bailout helps only *American* firms, not the rest of the world, which is still holding all this crap that Wall Street sold them (see #2) for the past ten years. (This is precisely why foreign central banks rushed into the breach to buttress their banks with cash infusions, e.g. Deutsche Bank.)
More on my weblog today. As Quad says, you will be wise to REALLY start paying attention to this. Better late than never (even if the hour IS late). ;p
Lloyd
Sentence from the above clarified thanks to caffeine infusion just now. ;-)
“These derivatives are NOT backed by now increasingly-worthless American real estate, BUT by now-worthless corporate, government, credit card and car loan bonds.”