The Great DepressionIf it were not for the reforms we put in after the Great Depression, we'd have people living in cardboard boxes, selling apples and maybe even jumping out of windows. It's that bad, I think. So it is maybe time to look back and think about what went on. I'll put on my space alien antennae and vulcan ears and travel back to the 1930's and look around. Clearly people are in misery and pain; some are starving. There's plenty of farmers and productive land so there's no problem growing the food. There are plenty of people who can drive; there's trucks and fuel, so transportation isn't a problem. Lot's of warehouse space, lot's of store space for distribution. What's missing? Money, you say, but I'm a space alien, what's that? Back in the present I'll take off the antennae and answer my own question. Money is a promise. By itself worth nothing, but as a promise for goods or services whenever I want or need them them, worth quite a bit. We have plenty of food, gasoline, shelter. What we don't have is confidence in the promises. A bank makes a second order promise; they take my collection of promises and promise to return them to me. In the meantime they pool my and other's promises and give them to someone else who makes a third order promise to return the bills to the bank. When the banking system overextends (as it did in the 1930s and as it's done today) and people lose confidence in the promises you get a crash. In the 1930's they lost confidence in the second order promise; people didn't believe the bank would have their money. Today, the problem is with the third order promise. It's not so much that the banks don't believe in the ability to repay (although they've tightened up in that respect), it's that they don't have the money to lend and our economy needs credit based sales to keep running. The root cause is the same whether we are talking about the 1930s or today; overextended credit. Back then it was stocks bought on margin; today it is overvalued mortgages. But we have plenty of food, gas, and shelter. I'm not suggesting a different means of distribution, I can't think of a better one than money for all its flaws. I'm not suggesting a different approach to the bailout package. It doesn't matter whether you agree with the Democrats or the Republicans, the idea is to address the third order promise. I guess my alien antennae are built in. In spite of my analysis above, I don't see why, when we have plenty of food, gas and shelter, anyone should go without basic necessities.
7 Feb 2009
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