prevent another great depression

The Federal Reserve has not run out of ammo yet. It can cut rates to zero if necessary and then escalate to direct infusions of money by purchasing bonds – or indeed by buying a vast range of securities, assets and even houses if necessary. Ultimately it can print money to cover the budget deficit.
As the late Milton Friedman put it, governments can drop bundles of banknotes from helicopters. If they really want to defeat to deflation, they can.

The modern warning to us all is the "Lost Decade" in Japan, a loose term for the on-again, off-again slump that ultimately led to zero interest rates and – when that failed – to the printing of money. After 18 years, the Nikkei stock index is now trading at 8,000 – down from a peak of nearly 40,000. House prices have fallen by half. Yet after all the stimulus, the country is once again tipping back into deflation.
The curse of deflation is that it increases the burden of debts. The people take home less money because of unemployment: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck's Grapes of Wrath.
We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater.

In economics Keynesian economics is based on the ideas of twentieth-century British economist John Maynard Keynes. According to Keynesian economics the state can stimulate economic growth and improve stability in the private sector - through, for example, interest rates, taxation and public projects. Of course, Keynesianism has its critics, most of them conservatives who loathe the idea that government could ever play a beneficial role in the economy.
What is not in contention is that even Keynes' critics call him the greatest and most influential economist of the 20th century. For this reason, he is known as "the father of modern economics."

When the Great Depression hit worldwide, it fell on economists to explain it and devise a cure. Most economists were convinced that something as large and intractable as the Great Depression must have complicated causes. Keynes, however, came up with an explanation of economic slumps that was surprisingly simple. In fact, when he shared his theory and proposed solution with Franklin Roosevelt, the President is said to have dismissed them with the words: "Too easy."

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money, or stop spending, in difficult times, but times become more difficult when people hoard money.

The cure for this, Keynes said, was for the central bank to expand the money supply. By putting more bills in people's hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished. Just that simple! Too simple, in fact, for the policy-makers of that time.

If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend. In his memorable phrase, Keynes called this "priming the pump" of the economy, a final government effort to reestablish the circular flow of money.

Keynes' advice on ending the Great Depression was rejected. President Roosevelt tried countless other approaches, all of which failed. Almost all economists agree that World War II cured the Great Depression; Keynesians believe this was so because the U.S. finally began massive public spending on defense. This is a large part of the reason why "wars are good for the economy." Although no one knows the full secret to economic growth (the world's top economists are still working on this mystery), wars are an economic boon in part because governments always resort to Keynesian spending during them. Of course, such spending need not be directed only towards war -- social programs are much more preferable.

In seven short years, under massive Keynesian spending, the U.S. went from the greatest depression it has ever known to the greatest economic boom it has ever known. The success of Keynesian economics was so resounding that almost all capitalist governments around the world adopted its policies. And the result seems to be nothing less than the extinction of the economic depression! Before World War II, eight U.S. recessions worsened into depressions. Since World War II, under Keynesian policies, there have been nine recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92 ), and not one has turned into a depression. The success of Keynesian economics was such that even Richard Nixon once declared, "We are all Keynesians now."

Let me just say that I believe we will shortly enter a period of Keynesian spending and that it will be the foundation of an Obama administration rescue of the economy. I caution those who would adopt similar spending programs at the state level, believing Indiana can spend its way out of recession. Indiana does not have the macro powers of the fed to print money. Indiana should keep to a balanced budget and let the federal gov engage in aggressive spending. The goal locally is to control budgets and keep as many people employed as possible. Our congressmen and senators can help us most in Washington by laying their hands on as many federal dollars as they can for our state. We want huge federal spending to take place in Indiana. But debt, including bonds, Mr White at IPS, should be avoided in a period of deflation, because revenues are decreasing and that debt will look bigger and bigger. Andre Carson should go bring federal money home to Marion County. All our representatives and senators should bring home the bacon from Washington. But our State legislature should trim the fat.

Don't forget the role that WWII had with the booming economy of the late forties, and fifties. The US was the only industrialized economy left.

There is astounding logic in Keyne's theories and while he advocated govt's role, it was with limited "intrusion" on the marketplace. Interest rates, taxes, infrastructure, legislation and budget policies can all influence business. However the largest threat to an economy is public perception. Consumers will hoard their money, pay off bills, and spend much less. And while this process is taking place, retailers will feel an immediate negative impact = the cycle. Wallstreet is already feeling the impact of this cycle. Of course the question; if this is a cyclical economic downturn, then why have the markets fallen so much? Since the markets are driven by "trading" and trading is based on perception, it stands to reason that the market drops are due to selling, fueled by low public perceptions. Then in a day or two, as has been the case, they regain points due to buying, people like myself who follow the old rule of buy low, sell high. The public's perception is driven by the media and the most important missing link = leadership.

Chris wrote:

There is astounding logic in Keyne's theories and while he advocated govt's role, it was with limited "intrusion" on the marketplace. Interest rates, taxes, infrastructure, legislation and budget policies can all influence business. However the largest threat to an economy is public perception. Consumers will hoard their money, pay off bills, and spend much less. And while this process is taking place, retailers will feel an immediate negative impact = the cycle. Wallstreet is already feeling the impact of this cycle. Of course the question; if this is a cyclical economic downturn, then why have the markets fallen so much? Since the markets are driven by "trading" and trading is based on perception, it stands to reason that the market drops are due to selling, fueled by low public perceptions. Then in a day or two, as has been the case, they regain points due to buying, people like myself who follow the old rule of buy low, sell high. The public's perception is driven by the media and the most important missing link = leadership.

You are sooo right with your mantra. Buy low sell high, especially when you have many years before retirement. It is sad that many people follow media frenzy and do the exact oposite (sell low and buy high)

WDCJoe wrote:

<quoted text>
You are sooo right with your mantra. Buy low sell high, especially when you have many years before retirement. It is sad that many people follow media frenzy and do the exact oposite (sell low and buy high)

I was surprised to hear today that it's not the day traders feeding this selling frenzy, it's actually the fund managers. One would think they would be a little more patient considering their line of work. But then again, I'm no fund manager and I'm quite content where I am..

Chris wrote:

<quoted text> I was surprised to hear today that it's not the day traders feeding this selling frenzy, it's actually the fund managers. One would think they would be a little more patient considering their line of work. But then again, I'm no fund manager and I'm quite content where I am..

The more we learn (change) the more we stay the same! Wall Street still has not learned it's many lessons. The thing that terrifies me the most is the next lesson that may come down the line!

Chris wrote:

<quoted text> I was surprised to hear today that it's not the day traders feeding this selling frenzy, it's actually the fund managers. One would think they would be a little more patient considering their line of work. But then again, I'm no fund manager and I'm quite content where I am..

That is how bad it has gotten. The fund managers know they have to get out by the end of the year. It is the end of the year. Trillions of dollars have now left or have been lost in the market. For some of us, we stashed it in other places three months ago, for the rest, it is gone.

Obama's intention of letting the Bush tax cuts expire and his insistence on raising capital gains taxes will kill what is left of the market. There have been some that have posted that there is no connection between the fall in the Dow and the election of Obama. I don't know if these people are uninformed or just plain dumb. The two are linked. Denying it destroys the credibility of the poster.

Chris wrote:

There is astounding logic in Keyne's theories and while he advocated govt's role, it was with limited "intrusion" on the marketplace. Interest rates, taxes, infrastructure, legislation and budget policies can all influence business. However the largest threat to an economy is public perception. Consumers will hoard their money, pay off bills, and spend much less. And while this process is taking place, retailers will feel an immediate negative impact = the cycle. Wallstreet is already feeling the impact of this cycle. Of course the question; if this is a cyclical economic downturn, then why have the markets fallen so much? Since the markets are driven by "trading" and trading is based on perception, it stands to reason that the market drops are due to selling, fueled by low public perceptions. Then in a day or two, as has been the case, they regain points due to buying, people like myself who follow the old rule of buy low, sell high. The public's perception is driven by the media and the most important missing link = leadership.

Hey Chris. The key is in your last sentence. Where is the leadership? Bush may be a lameduck but why in the hell isn't he trying to calm the public? I'm a republican, but I have never cared for this president and honestly never voted for him. I voted democrat once and libertarian the other time. And where is the leadership in the auto industry? Flying around in there private jets trying to get a handout from the taxpayers. As congress stated, I too want to see a plan. I want to know why they feel that avoiding bankruptcy is going to work. I thought the AIG bailout was a mistake, and here we are with another industry. Who will be next for a bailout?

They already have their hands out. Home builders, Aircraft builders, California, New York, just to name a few. The original bailout never should have been approved. The Democrats will be saddled with this in 2010. The Republicans that went along with the Democrats will lose in the primaries and will be replaced by true conservatives. That is the path back to leadership. Republicans trying to be like Democrats is what has caused them to lose seats.

Tom Ash wrote:

<quoted text>That is how bad it has gotten. The fund managers know they have to get out by the end of the year. It is the end of the year. Trillions of dollars have now left or have been lost in the market. For some of us, we stashed it in other places three months ago, for the rest, it is gone.
Obama's intention of letting the Bush tax cuts expire and his insistence on raising capital gains taxes will kill what is left of the market. There have been some that have posted that there is no connection between the fall in the Dow and the election of Obama. I don't know if these people are uninformed or just plain dumb. The two are linked. Denying it destroys the credibility of the poster.

The dow conitnues to sink because the greatest damage has been done. To use an example. If you have a ship that strikes and reef and begins to take on water and inthe middle of it's sinking change captains, what do you get? Nothing. You have to tackle the issue of the gaping hole. W still have a hole in our economy, a rift that will take much more than electing an official to fix. In addition, the market changes slowly. Once a downward spiral becomes routine, further declines are inevitable in many instances. Check out factcheck.org and see what they have to say about the economic crisis of 2008. Their a nonpartisan group hwho have dumped plenty of blame on the dems as well as repubs.

ChrisRX wrote:

<quoted text> Hey Chris. The key is in your last sentence. Where is the leadership? Bush may be a lameduck but why in the hell isn't he trying to calm the public? I'm a republican, but I have never cared for this president and honestly never voted for him. I voted democrat once and libertarian the other time. And where is the leadership in the auto industry? Flying around in there private jets trying to get a handout from the taxpayers. As congress stated, I too want to see a plan. I want to know why they feel that avoiding bankruptcy is going to work. I thought the AIG bailout was a mistake, and here we are with another industry. Who will be next for a bailout?

Bush has done a lousy job, no doubt. I'm a conservative independent and don't necessarily support one party or another. From an economic standpoint, Bush has never been conservative. As for the auto execs, I truly believe they want to file Ch#11. The benefits to the industry far outweigh the negatives if you look at long-term growth. Prior to filing Ch#11, they still have to exhaust all other options. This trip to congress was one of them. I really think they expected a resounding "no", but this congress actually shocked them. Plan? I would bet it is now being developed at a "feverish" pace in order to meet the Dec deadline. A simple "reductions" plan can be written within days, however developing a plan which includes a new business model would take months for a GM,Ford,or Chrysler. And now throw in the big question. If you must disclose your operations, how do you hide the fact that your currently building a massive factory in Russia, while also expanding Latin American operations? Will congress really want to provide more incentive to you? Is that patriotic?

Tom Ash wrote:

<quoted text>That is how bad it has gotten. The fund managers know they have to get out by the end of the year. It is the end of the year. Trillions of dollars have now left or have been lost in the market. For some of us, we stashed it in other places three months ago, for the rest, it is gone.
Obama's intention of letting the Bush tax cuts expire and his insistence on raising capital gains taxes will kill what is left of the market. There have been some that have posted that there is no connection between the fall in the Dow and the election of Obama. I don't know if these people are uninformed or just plain dumb. The two are linked. Denying it destroys the credibility of the poster.

Many, if not most of the fund managers appear to be acting on fear. Fear of continued selling, therefore continued free-falls. I'm no expert in this area, but I truly believe they are influenced by a lack of leadership in the country. Keep in mind, both candidates were chosen fairly early in the year, despite the "hillary challenge". Had the primaries been held in September, there is no doubt in my mind the candidates would not be the same in either party. Both were chosen by their parties based the issues at the time, Iraq, Taxes, Education funding, etc.. Neither Obama nor McCain had the experience needed to fix our economic ills. We have to hope that Obama chooses experienced economic advisors. We also need to see congress remain split in order to keep some balance. As for the taxes, I honestly don't think Obama's capital gains taxes will pass muster, given the market conditions. Over 22million americans are invested on some level, and most of them vote. Increasing capital gains taxes would be the poison pill for the markets and 22million voting investors. As for Obama the cause of the market drops; keep in mind this has been a bear market now since late September. It dropped, then even rallied in early October, I believe it even set a record. I think the bailout has done more harm than anything else, and it's growing!

Chris wrote:

<quoted text>Many, if not most of the fund managers appear to be acting on fear. Fear of continued selling, therefore continued free-falls. I'm no expert in this area, but I truly believe they are influenced by a lack of leadership in the country. Keep in mind, both candidates were chosen fairly early in the year, despite the "hillary challenge". Had the primaries been held in September, there is no doubt in my mind the candidates would not be the same in either party. Both were chosen by their parties based the issues at the time, Iraq, Taxes, Education funding, etc.. Neither Obama nor McCain had the experience needed to fix our economic ills. We have to hope that Obama chooses experienced economic advisors. We also need to see congress remain split in order to keep some balance. As for the taxes, I honestly don't think Obama's capital gains taxes will pass muster, given the market conditions. Over 22million americans are invested on some level, and most of them vote. Increasing capital gains taxes would be the poison pill for the markets and 22million voting investors. As for Obama the cause of the market drops; keep in mind this has been a bear market now since late September. It dropped, then even rallied in early October, I believe it even set a record. I think the bailout has done more harm than anything else, and it's growing!

Everyone is scared. Scared of Obama sitting in the oval office. To bad Romney wasn't the chosen one or even Huckabee. At least both of them have executive experience.

Taxpayer wrote:

Everyone is scared. Scared of Obama sitting in the oval office.

These are people likely scared of their own shadow, thus likely needs professional treatment.

Taxpayer, it is time to get over it and accept it. Or seek treatment from someone who gives a crap.