Last evening I was reading my RSS subscriptions, commenting on some threads about the Feds decision to lower interest rates, and I really started to think about the US (and world) economies. Ultimately, the question “is another depression on the way” came to mind yet again…  So I decided to put some things down on paper (and then into the blog) in order to assess the question.

• The speed of current deep recession

The US went from a shallow recession, with low unemployment, to one of the worst financial crises since 1929 in a matter of weeks.  Yes, the events were in the building for months, if not years, but it all came apart in roughly 4 to 6 weeks…. and no one was prepared for how quickly it happened.  

• Credit is hard to come by

The credit industry is contracting, and contracting fast.  Credit Card companies are cutting limits of superior borrowers, for some it’s hard to get a mortgage, companies – solid companies – cannot find funding even though they have revenue to cover their costs, and banks are not lending to each other.  Basically, spending is crawling because the pool of money has shrunk

• Oil is down today, but…

The price of energy (oil, specifically) was on a wild ride the last 4 years, up to almost $150 this past summer and down to $40 the past week.  However, due to limited supplies and production, oil will start to rise over the next year once the economies of the world begin to stabilize, causing pressure on economic growth once again.

• Debt is overwhelming…

The government is so far in debt, it will never be repaid, and our financial institutions are in the same boat . Essentially, we are spending money today that we don’t have in order to solve a problem.  In doing so, however, we may be creating a bigger problem down the road.  

Oh, yea, and the consumer is so far into debt that they have no money and cannot obtain credit (see #2).  If the consumer cannot spend, how will the economy recover?

• Unemployment is on the rise…

Going from historic lows to levels not seen in about 20 years, unemployment will play a big fact in any the economy’s recovery.  If it continues to rise, problems will persists.

• Mortgage meltdown, real estate bubble…

Huge over production of housing, mortgages to anyone and everyone that had a heartbeat and property values inflated beyond true value…. it plays into everything.  Spending, debt, credit…. and if this does not stabilize, how will the credit markets stabilize?

There were initial thoughts…  I do believe the economy is dangerously close to moving into another depression.  While I do not believe any depression will mirror the Great Depression, it is strikingly like the Long Depression on 1873.

Without a doubt, the actions taken by the government will provide some type of recover in the market – I just doubt if it will be a sustained recovery.

Oh, and another random thought… 

I am slightly concerned about how the stock market has been acting the last two weeks.  It is back to trading upward on negative news.  The economic situation has not changed, so why the movement towards the positive?  

Either a bottom has been found or a suckers rally is taking place…. I just hope it is a bottom.

There are a number of things that are being said in the news / press / world of blogs that I need to be addressed.

The Stock Market is not the economy

Without a doubt, the stock market is wild right now.  The press gets excited when the wild swing and destruction of capital takes place, but it has happened a number of times in the past – it’s all part of capitalism.  It happened in 2001, in 1990, 1987, early 80s… and on and on and on.

Corporate scandals, poor business practices, and just plain dumb luck will lead to situations like this all the time.  Currently, the financial industry is in disarray but this does not equate to an overall bad economy.  While economic growth is not historic highs it is also not contracting.  As of now, the United States is not, officially, in a recession.

The collapse of AIG, et al., is not a giant conspiracy

I want to know if people are still taking their medication.  More and more there are stories / commentaries that the bailout of AIG is due to the company being a front for the government or that we are heading into a financial dictatorship.

The reason AIG was given what amounts to a structured bankruptcy is quite simply. Their debt, the bonds they offered, was considered to be some of the highest-grade investment vehicles on the market.  Just about every major company in the WORLD owns said bonds and if the assets suddenly became worthless, the potential for failures of companies worldwide was very real.

The $700 Billion dollar rescue is the right thing

The creation of a Resolution Trust is the right thing to do and creates a bottom for the mortgage industry – the mortgages are now set with a value established by asset managers, backed by the government, and create a tradable security for the investment market.    Furthermore, as the real estate market improves the government will be sitting on A HUGE asset bank that goes right back into the treasury.

This is all caused by poor regulation, greed and policy

Yes, policy created this current situation, but it wasn’t Bush policy – it was Clinton policy.  President Clinton pushed extensive changes allowing lenders to distribute and fill “questionable” loans, his legislation – essentially – allowed the sub-prime mortgage industry to start.

In 2002, Ron Paul called for change due to the financial risk, in 2003 President Bush recommended a regulatory overall to prevent a collapse and in 2005 John McCain warned of a financial collapse but NO one acted.

Who failed to act?  Congress.

Bankers utilized the “loose” regulation and got greedy.  They started to issue loans to individuals who could not afford their loans and, next thing you know, boom there is a crash.

This is life…

The stock market, the economy and life are full of ups and downs.  What the government is doing right now is attempting to provide stability to the financial and credit markets, and as the economy as a whole.  Is it what I want to see in a free market society, no?  Is it the right thing to do, yes.