My Take on the Economic Crisis

Hello all. Im new to ATS, but I wanted to post this and basically just have my say.

Many people are in a panic right now because of the economic recession. Several banks have fallen, (Lehman Bros. and Washington Mutual are examples) and people are scared of another depression. Congress is currently (10/1/08) trying to pass a bill that will "bail out" the crashing banks. I wish now to dispel any misconceptions and/or lies that have been told to you up to now, and what I believe to be the best possible outcome for our nation.

The bailout plan involves the acquisition of 700 billion dollars of "mortgage backed securities" or mortgage loans, held by our banks and gives them to the U.S. Treasury. This is supposed keep our banks from collapsing under the weight of their own debt. Presently there has been no word of where this money will come from. It may come from taxpayer money, which will increase the 10-trillion dollar public debt (probably to 11 trillion), or the money may be printed, which will cause hyperinflation and dramatically reduce the value of the dollar.

Looking back on history we can see two relatively recent examples of economic collapse, the Great Depression and the fall of the Weimar Republic, each collapsed in a uniquely distinct way. The Great Depression was caused by a stock market crash and bank collapses, which caused money to stop flowing in our economy, and the Weimar Republic collapsed because of hyperinflation, which caused their money to become worthless, even as they tried to force more and more of it through their economy.

So what does this mean? Well the best way to explain it is that in a Great Depression style collapse you stand by and let capitalism run its course. No bailouts, no printing more money. The banks fail from their own stupidity and no one can save, access, or transfer funds, no cashing checks, no investing, you only have the cash in your wallet and sock drawer. However that money is still meaningful useable cash. The remaining mom and pop businesses and common citizens can still carry out transactions the day after the collapse, because the physical money left in the system still works. In a Great Depression style collapse, the economy is only severely damaged. The common citizen and enterprising entrepreneur can still, eventually, start up a new economy and banking system because that foundation is still there, a stable currency.

A Weimar Republic style collapse takes a different approach to handling debt and failing banks. In an effort to keep their banks from falling, or to make payments on debt they print piles and piles of new cash and try to make payments with that. This is the result of poorly-thought out planning made with panicked logic. The fact is that currency is just not numbers on a bank note, or shiny round coins. Each coin, each digit is a representation of our nation's wealth, expressed as a fraction. A penny is an infinitesimally small fraction of the United State's wealth. As our nations wealth rises and falls, or is affected by tremendous debt, our currency becomes more or less valuable than before. As proof of this, some of you may have noticed that our currency is now less valuable than Canadian currency. This is because of our massive public debt and failing banks. There is less wealth in our nation, and fewer people (nations) now trust our currency. This is the reason that printing massive amounts of new money is generally a bad idea. As we print more and more money, our wealth is divided more and more times into each new piece of currency, lowering the value of that piece of currency. This causes poverty for the entire nation, as the currency become worthless. You pay 2x, 5x, 10x as much for the same things you had to buy earlier, and workers no longer want to work for the now worthless currency. In a Weimar Republic style collapse, not only the banks fall, but the people as well.

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Now having understood both types of economic collapse which seems worse? The collapse where the only the banks fall, leaving the people to rebuild the economy (Great Depression), or the collapse where the people go down with the banks? (Weimar Republic)

That said, I have three major issues with the "bail out" plan. I think it will fail either because:

A. The concept is wrong. Printing more money weakens the economy, because it weakens the dollar. Or if they choose to pay for it with taxpayer money the debt is only shifted to the trillion-dollar public debt, and makes it a useless exercise of fool bureaucracy.

B. It simply won't work because it's mathematically insufficient. 700 Billion is a lot, but comes far short of our nation's debt. This will only delay the inevitable. It's like taking out a loan to meet the monthly payments for the loans you can't afford to pay on. Even is 700 billion real, meaningful un-inflated dollars magically appeared in the system, we would still be 9 trillion dollars in debt.

C. We're saving the incompetent fools who put us here in the first place. Capitalism works because the pain of failing forces people to succeed. If the paper-pushers who made these piss-poor financial decisions don't suffer for their stupidity, they are simply going to continue making bad decisions. Even if god descended on earth and made all our debt and misery vanish in an instant, these same people will put our nation back in debt all over again.

The most favorable thing to do right now is try and hold on to the dollar's value as much as possible, and if anything try to strengthen it. If we choose to allow capitalism to run its course, it will be the common man that restores the economy, and they will need a strong currency to do that. Everyone is screaming "not a Great Depression! Oh noes!!!" however that’s really the best we can hope for right now.

History repeats itself. It's repeating itself right now, and if this bill passes, we are making the stupid decision. Our economy IS going to collapse, a statement no one wants to make, but deep down inside, all know its true. We simply don't have 10 trillion dollars. Our banks simply can't take any more debt. We can't change the fact we have buried ourselves in our own debt hole, but right now we can choose to stop digging that hole, and hope that not everyone gets buried in it. Please don't support the "bail out". Please let us only suffer a depression, and not a total economic collapse.

Links:
Info on proposed bailout:
en.wikipedia.org...
Info on current public debt:
en.wikipedia.org...
Info on Great Depression:
en.wikipedia.org...
Info on Weimar Republic:
en.wikipedia.org...

I know not everyone like using wikipedia as a reference, but I've always found it reliable. Also, if my knowledge of the economy is wrong, its because im not an economist, im just an average guy that has looked at history and is confused by the current actions of congress.

Oh, and just for the record: I know that there were several causes for the fall of the Weimar Republic (for example, Nazi's) however I was looking at it from purely an economic perspective. It suffered from severe hyperinflation before it died. You were probably told stories in school of how citizens had to buy a loaf of bread with a wheelbarrow full of money. Printing money in mass quantities is never a good thing.

Excellent first post pesky. Your concerns are my concerns as well. The Wiemar/GD comparison is relevent and I thank you for the post. I hope we have an idea which way it will go before the election.

Things have progressed to the point where in my opinion the best case scenario is a "Lost Decade" type scenario ala Japan. However, Japan had a couple of things going for it we don't--an export centric economy and a high saving rate. There are a couple of other precedents for financial crisises past that may provide some ideas for other potential outcomes as well. I think it was Sweden (but it could have been another Scandinavian country) that had a serious financial crisis a decade or so ago. I don't think that model would be to appealing here because the government ended up nationalizing the banks during it.

I personally hope we are both wrong.