Thursday, September 18, 2008

I'm really popular at school this week....

Suddenly, being the Economics teacher makes me the popular guy at school! Yesterday, I left the house with 1 hour left in the trading day and the Dow down less than 200. When I got to school an hour later ( I ride my bike 16 miles to get there!) turned on the computer, my cry of "Holy Shit!" turned some heads. Next thing you know, I'm late for my class because everyone wants to ask me if the end of the world is coming (I don't think it is, but we are going to have a rough couple of years).

Clearly, a credit crisis threatens our whole economy, which is why the Fed and Treasury are trying to shore it up. The dilemma is that the people who screwed this up should surely be made to pay, but we may have to bail them out to keep the rest of the economy from collapsing. Better a couple hundred billion in bailouts now than another Great Depression.

That is the other question people are asking me: are we headed for another depression. First, many who ask have no idea how dire things were then. Unemployment of 25% (6.1% not), a 25% drop in real GDP from 1929 to 1933 (We aren't even technically in a recession yet!), 25% drop in CPI (we just had a slight drop in august) caused by the Fed allowing the money supply to shrink ( no way Helicopter Ben, student of the Depression, is going to allow that). Also, back then there were none of the safety mechanisms, like the FDIC, that exist today, most of which were started as a result of the Depression. So, NO, we are not going to slide that far.

But, if we didn't have those "faith keeping" institutions like the FDIC, we could. During the Depression, when real estate values plummeted, folks walked away from the from, stuck the bank with the property, which took down the bank and all it's depositors, which caused a run on the banks and a lack of any money for capital expansion. This time, the damage so far is mostly on Wall Street, where there has been a bit of a run on the investment banks, which is what has closed them, but ordinary people are not lining up to get their money out of the bank before it goes under.

I think we are headed for a few bad years as this works it's way through the economy. But remember, we got whacked double this year: The financial crisis, and a big leap in fuel prices, and most of us are still working and driving around. The world economy will slow for a while, but you can't sustain the type of growth the world has undergone for the past 10 years without a pullback.

1 comment:

ClaireWalter said...

Wall Street has a bipolar disorder. Bad news and the market tanks by hundreds of points. Perceived good news the next day and the market rebounds.

I still wonder how long it will take for a sustained period of economic health to being paying the natl debt of how-many? trillion bucks.