Surviving the Great Collapse

THE CRISIS II – Excerpt From IHT
Surviving the Great Collapse
By Robert Kuttner
Published: March 12, 2009
This economic crisis doesn't have to be a second Great Depression — if government does nearly everything right, and soon. But if government doesn't do more, and fast, this could be worse than the 1930s. Why? There are three big reasons:
Finance: A Doomsday Machine. The financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, there was a stock market bubble, mainly because people could play the market "on margin," borrowing to invest in stocks. There were also scams like the original Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules.
But today, thanks to "securitization" of loans and the ability of insiders to create exotic and unfathomable financial instruments, the speculative system makes buying stocks on margin look like child's play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do.
We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.
In 1929 when the stock market crashed, the banking system was relatively healthy. Bank customers played these speculative games and took the losses, not banks. This time, the banks drank their own Kool-aid.
It took until the awful winter of 1932-'33 for the general depression to fully infect the banking system, and cause over 7,000 banks to fail. But Roosevelt's cure — deposit insurance and a temporary bank holiday to sort out good banks from bad — quickly got the financial system up and running again. Today, the banking mess is still dragging down the real economy, with no effective cure in sight.
Wealth, Deficits, and Demand. The economy now bears all the hallmarks of a depression. Between the housing collapse and the stock market crash, American households are out several trillion dollars (in the 1920s, there were no 401(k) plans and less than 2 percent of Americans owned stock).
When people are suddenly out a lot of money, they spend less. Weak demand in one sector is cascading into other sectors. People spend less on autos, air travel, hotels, restaurants, clothing — any optional purchase. Business sales and profits are down, which causes other layoffs, and the cycle deepens.
Roosevelt was said to be a big spender, but his biggest peacetime deficit was only about 6 percent of GDP. This year, the deficit will exceed 11 percent, and the recession will deepen all year. It took the truly massive deficits of World War II — nearly 30 percent of GDP — to finally end the Great Depression
A Debtor Nation. America in 1929 was a major international creditor. Today, the U.S. is the world's biggest debtor. The financial bubble created the illusion of prosperity.
During the bubble years, the foreign borrowing disguised domestic weaknesses, such as our much-diminished manufacturing sector. For now, foreigners are still willing to lend us vast sums, but that may not continue indefinitely.
All these economic calamities have solutions, but each is more radical than what's currently on offer. The government will have to temporarily nationalize major banks, sort out good assets from bad ones, and then return banks to responsible private ownership. To cure the housing collapse, government should directly refinance mortgages, rather than bribing banks to ease terms.
Deficits will have to be a lot larger before they can get smaller. That should not require a war; this is just as grave a national emergency. Those deficits could purchase much broader prosperity.
This crisis doesn't yet have a name. It has all the hallmarks of a depression, but people are understandably reluctant to use the D-word. So let me suggest one: The Great Collapse, since this was both a financial collapse and an ideological one.
Can America recover from a Great Collapse? Can we avert a second Great Depression? To coin a phrase, yes we can. But we need the right strategies and we don't have much time.
Robert Kuttner is co-editor of The American Prospect and author of "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."
(The Boston Globe)

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What caused the Recession?

We are now living in one of the worst global financial crisis. This is proven by the fact that a lot of economies are going into recession and trillions of stock values were wiped out. Aside from these, a lot of companies have reduced their earnings with a lot of plant closures and job lay offs.

We often hear the word recession. We’ve watched news that Singapore, Germany, Japan, and New Zealand officially declared recession in their economies. But what is recession? And what caused it?

Recession, in economics, is defined as the contraction of an economy’s Gross Domestic Product for at least two consecutive quarters. That means the economy shrank.

We all know that the world’s largest economy is that of the United States. A lot of countries depend on them most especially countries which depend on export products. There’s this popular saying that “when United States sneezes, everybody catches a cold”. This is so true nowadays which is evident in the domino effect of the global financial crisis with a lot of economies caught colds.

What caused the recession? The problem started in the United States with the so-called Subprime Mortgage Crisis. The crisis was triggered by the rise in mortgage delinquencies leading to foreclosure of houses and ultimately a credit crunch leading to a freeze in liquidity.

Subprime Mortgage are mortgages given to high default risk credit borrowers. A lot of mortgages issued in US are called subprime which means that little or no downpayment was made by the borrowers to buy houses, cars, etc. Some credit were even given to low income families or with bad credit history. Because of the nature of these mortgages, a lot of borrowers defaulted on their loans which led to banks foreclosing securities of these loans including houses, cars, etc.

All these accumulated and led to the “credit squeeze”. There were no more cash available to other borrowers as all these cash were frozen to foreclosed houses with no willing buyers. The tightening of credit led to a slow down of the economy as there were no more loans available to other borrowers which they can probably use as capital in their businesses. Now, this led to a series of events:

Low Demand.
Because of the tightening of credit, there was a slow demand of products of these businesses.

Decrease of Profits.
Because of low demand, then there was a decrease in profits for these businesses.

Plant Closures.
Because of decrease of profits, then companies need to shut down some of their plants to reduce costs. There was also a notable increase in bankruptcy filings.

Job Lay Offs.
Because of plant closures and bankruptcy filings, then companies laid off a lot of their employees and unemployment rate rose.

Stock Market Decline.
All these series of events led to the rampant fear of stock investors dumping their stocks which led to tremendous wipe outs of stock values.

The United States and other countries are all doing their best to combat this financial crisis by using different strategies including the recent US$700 Billion bail out plan to increase liquidity in the economy. US Treasury is providing millions and billions of loans to ailing companies to sustain this financial crisis and prevent further recessionof other economies.