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  1. The Politics of Debt » Rally to Begin for At Least Two Months October 3, 2008 @ 12:10 am

    […] what. I even have an article about the timing of the “liquidity crisis”, announced the top of the Dow Jones and I even discussed how the new high of the Dow Jones back in […]

  2. Rally to Begin for At Least Two Months | Finance Money Financial News December 24, 2008 @ 6:51 pm

    […] what. I even have an article about the timing of the “liquidity crisis”, announced the top of the Dow Jones and I even discussed how the new high of the Dow Jones back in […]

  3. Dale January 20, 2009 @ 9:48 am

    You have explained the predicament of the American people in a way most people just don’t understand. I remember in the early eighties when the pundits were talking about the U.S. going to a “service-based” economy. What people don’t realize is that wealth is created when tangible goods are produced.

    The fundamental principles of economics have never changed. In ancient days, the measure of a person’s wealth was taken by how many flocks and how much land he possessed. The same still holds true in a way. Services exist to support the economy, not to be the economy.

    It’s pretty absurd on its face. If we just continue “servicing” each other, we’re just recirculating the same money over and over, and eventually the money runs out. We’re not creating true wealth. Look at the hospitality industry for example. How long do you think…say a beach resort, can keep its doors open when all its customers are making minimum wage working for the hotel across the street? Not very long, I think.

The Timing of the "Liquidity Crisis"

Economics, Politics Comments (3)

This “liquidity crisis” was patent back in September of 2007. We then discussed whether it was a real liquidity crisis or confidence crisis, but that was just an academic exercise. The point is that what happened last week and prompted the President’ “There is nothing to fear… Fear!!! Panic!!! Oh my god we all are going to die”, speech is nothing new.

The timing of this latest crisis, however, is interesting. The financial industry, who benefited of the current administration policies, and has deep ties with the McCain group, put a gun to the legislative branch head and threaten with pulling the trigger if it did not receive “a really large amount of money” (their words) right before the elections, forcing a rapid decision in front of a scared public. This was, by the way, the same tactic used to force the country into the Iraq war.

In my previous post I point out that this bailout will not solve anything because there is no way to guarantee that the banks will start lending money to the American public again at reasonable rates, which will bring on a recession. However, it will create a rally on Wall Street into the elections. This may create the illusion that the economic problems of the country are solved and some voters may be swayed by it.

However, we will not see the effects of the new stringent lending practices for at least three to six months. At that time, the consumer economy will be the one grinding to a halt due to the lack of reasonably priced credit and we will face a recession that will surpass the Reagan recession both in depth (more than 10 percent unemployment) and length.

If the next president is a “free market” freak, he will be unwilling to create the government institutions needed to support the American economy during the consumer depression and will still hope that the banks start lending money again. He will keep creating deficits that do not result in increased economic activity by providing liquidity to those who needed the least and we will be faced with another deep recession.

On the other hand, if the next president is willing to apply the lessons taught of the last great attempt at free markets in the US and its results (the roaring 20s and the great depression) and he creates government institutions that provide credit, invests in industrial infrastructure and in creating the conditions for a great XXI Century Industrial America, we may avoid a big depression. That kind of deficit, the one that comes from putting money on people’s pockets, creating jobs, improving our infrastructure, creates the conditions for increased economic activity down the road.

This crisis was not, I must say, the doing of the current administration but it has been gestating over thirty years, with the destruction of the American industry. During the past thirty years, as we destroyed good jobs in America we ate the social wealth created during the previous thirty years.

The wealth of the “greatest generation” was created on the basis of strong government intervention, with programs like free college education to millions of returning soldiers, the creation of the industrial infrastructure that allowed us to prevail during WWII and become a standing power since.

There may be a generational component to the need of these large swings from free market to Keynesian economics. Keynesian economics was born out of the failure of the first large free market experiment in modern society. The generation who inherited the vast sums of social wealth created under that economic regime squandered and voted over and over free market presidents (Clinton is in some ways an historical oddity). Now we face another failure of the free market economics, and a new swing to Keynesian economics is not only possible but also necessary.

That’s why the timing of the Wall Street gun to the head is interesting. Most people will want to believe that the market rally is a sign of good times to come, and it may be difficult to explain the intricacies of this economy. It will also be hard to explain how this bailout does not solve the problems we face, which are not financial but go to the fundamentals of the economy. The term fundamentals of the economy, by the way, never meant “the workers,” that’s a desperate neologism of the McCain campaign.

The problem we face is that we have destroyed the backbone of the American economy, the only way to create new real money, which is the American industry. We relied on the banks to create money out of thin air, and we wanted to believe that we were creating wealth, when we were eating the accumulated social wealth of America. That’s why we can’t rebuild cities, or our infrastructure. That’s why we keep losing good jobs. That’s why we are being challenged by countries large and small.

The McCain campaign focuses on small budget issues like pork barrel spending, because he does not understand the gravity of the American crisis. He does not understand that the fundamentals of the American economy are broken, that we need an historical change.

Now, the “traditional explanation (of the great depression) is a combination of high consumer and business debt, ill-regulated markets that permitted malfeasance by banks and investors” (sound familiar?) and we are facing now an early similar scenario.

If we let the coming rally on Wall street sway our resolve to change the economic reality of this country, six months from now, when the overextended American people runs out of money and the consumer economy halts, we will get a cruel historical lesson. We will see firsthand how was it that Hoover let the country fall into the great depression.

However, if we learn from our history, we may be able to skip Hoover directly to FDR. And that’s the real election the American People is facing on this elections.

Franklin @ September 28, 2008

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