The Panic of 10/24/08

[DavidS]

On the 79th anniversary of Black Monday, the beginning of the Great Depression, DOW Futures have been halted for negative trading at -550. This is going to a doozy. Stocks only need to fall 869 points for trading to be halted once the NYSE opens.

With fears of a global recession, OPEC cut oil prices by 1.5 million bpd.

Watch out... today's gonna be a doozy.

 

[editec]

I need to read Bernake's take on the root causes of the depression.

I haven't been able to find his famous thesis on the subject, but I managed to find this:

You gold bugs who think that a return to the gold standard is what the Austrian school and Ben Bernake believes might find this interesting reading:

Perhaps the most fascinating discovery arising from researchers' broader international focus is that the extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery (Choudhri and Kochin, 1980; Eichengreen and Sachs, 1985).

The willingness or ability of countries to remain on the gold standard despite the adverse developments of the 1930s varied quite a bit. A few countries did not join the gold standard system at all; these included Spain (which was embroiled in domestic political upheaval, eventually leading to civil war) and China (which used a silver monetary standard rather than a gold standard). A number of countries adopted the gold standard in the 1920s but left or were forced off gold relatively early, typically in 1931. Countries in this category included Great Britain, Japan, and several Scandinavian countries. Some countries, such as Italy and the United States, remained on the gold standard into 1932 or 1933. And a few diehards, notably the so-called gold bloc, led by France and including Poland, Belgium, and Switzerland, remained on gold into 1935 or 1936.

If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery.

The evidence strongly supports this implication.

For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China--which used a silver standard rather than a gold standard--avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.

The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level. The new President also addressed another major source of monetary contraction, the ongoing banking crisis. Within days of his inauguration, Roosevelt declared a "bank holiday," shutting down all the banks in the country. Banks were allowed to reopen only when certified to be in sound financial condition. Roosevelt pursued other measures to stabilize the banking system as well, such as the creation of a deposit insurance program. With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly.

Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.

My conclusion?

the gold standard works WELL, until conditions change such that the need for capital DEMANDS and EXPANION of specie that the GOLD STANDARD will NOT allow.

World War I, destroyed the economy of Europe.

It deperately needed CASH in the economy to rebuild.

But it could not do that because why?

Because if those nations which needed money put more currency into their system the GOLD BUGS would attack their banking system by DEMANDING GOLD for their money.

So, in exactly time that nations needed to get currency into their system so they could begin increasing production, they were preented from doing so by those gold bugs.

Now I do NOT blame the gold bugs for being rational.

This is why Keynesian economics was the solution to the depression that america had.

that does not mean that Keynesian economic fixes will solve every economy every times.

Economies get scik for different reasons and the central banks need to apply diffferent solutions to DIFFERENT problems.

Hey, it's not called the dismal science for nothing.

 

[DavidS]

I need to read Bernake's take on the root causes of the depression.

There were three causes of the Great Depression.

Credit, credit and credit.

People got loans for buying food at restaraunts. They bought vacuum cleaners and refrigerators with loans. No credit cards. They actually bought everything getting a loan. When their bank failed due to the panic of the stock market collapse, they had no money. No FDIC back then. So they had no money to pay anything back, all of the bussinsses collapsed, all of the banks collapsed. If people had bought things without credit, and actually had the money, you wouldn't have seen the Roaring 20s... you would've seen slow, steady growth.

We saw the same thing in the 1990s but there are too many safeguards in place to allow another Great Depression... or at least we think there are.

We could be delaying the inevitable.

 

[KMAN]

There were three causes of the Great Depression.

Credit, credit and credit.

People got loans for buying food at restaraunts. They bought vacuum cleaners and refrigerators with loans. No credit cards. They actually bought everything getting a loan. When their bank failed due to the panic of the stock market collapse, they had no money. No FDIC back then. So they had no money to pay anything back, all of the bussinsses collapsed, all of the banks collapsed. If people had bought things without credit, and actually had the money, you wouldn't have seen the Roaring 20s... you would've seen slow, steady growth.

We saw the same thing in the 1990s but there are too many safeguards in place to allow another Great Depression... or at least we think there are.

We could be delaying the inevitable.

What a coincidence... Maybe we will stop loaning money to people who can't afford to pay it back and maybe the government will stop spending... Yeah right!

 

[WillowTree]

I need to read Bernake's take on the root causes of the depression.

I'll tell you what Neal Boortz had to say on the subject yesterday on Cavuto. "The stock market is tanking cause all the rich people are pulling their money out and moving it to hide away in case Obama gets in the WH."

 

[Navy1960]

Not that this has much bearing on the conversation , but why do I get the feeling that the Obama campaign is cheering the downfall of the stock market each and everytime it goes down. While today's trading will no doubt not be good given world markets and OPEC's little fit over oil prices all the more reason to quickly seek our own domestic supply. This cheering and doom and gloom though does have an influence on trading on the market and it really does seem that there has been this giddyness over this collapse, why because it helps get someone elected, I sure hope thats not the case.

 

[editec]

There were three causes of the Great Depression.

Credit, credit and credit.

People got loans for buying food at restaraunts. They bought vacuum cleaners and refrigerators with loans. No credit cards. They actually bought everything getting a loan. When their bank failed due to the panic of the stock market collapse, they had no money. No FDIC back then. So they had no money to pay anything back, all of the bussinsses collapsed, all of the banks collapsed. If people had bought things without credit, and actually had the money, you wouldn't have seen the Roaring 20s... you would've seen slow, steady growth.

We saw the same thing in the 1990s but there are too many safeguards in place to allow another Great Depression... or at least we think there are.

We could be delaying the inevitable.

I'll give you a pass because I think you might have responded to my post before I finished it.

I am sorry for this propensity of mine to post before I finish posting.

I know how forking annoying it must be. I do this because for some reason I cannot fully explain, I cannot really edit my work in this stupid little box where I craft my posts.

For some reason I need to see it as it will go online to really edit it.

But no, credit is not the WHOLE source of the problem according to the Austrain School of Econ, nor does the Kensian school think that was the root source of the problem, either.

Mostly the problem is that the amount of avaialble currency was not up to the task of rebuilding EUROPE, and the gold standard make getting liquidity into the market impossible.

Great Britian went BROKE trying to honor the GOLD STANDARD and their economy never really recovered.

So if nothing else, this tells us WHY Bernake saved the banks.

What it doesn't tell us is WHY Bernake ex=pected the banks to respond to the new liquidity it gave them by lending it out when it is in their interests NOT to lend it out.

 

[Care4all]

just opened and down 260 in the first 3 minutes

 

[Care4all]

down 340 now


SHIT....HOLY MARY, mother of God

down 400 first 4 minutes

 

[Care4all]

now down 450 4.5 minutes

 

[DavidS]

Drudge reveals his bias. They're talking about the "Obama Panic" which is the most ridiculous idea in the world. Obama's raising capital gains taxes to where they were under Clinton. 20% over $250,000.

 

[Andrew2382]

it's tanking because of hedge funds....people are taking their huge amounts of money from these hedge funds.

That why you see gold dropping also....in a normal economic situation when the economy drops gold rises....however both are dropping because the hedge funds to get th emoney to pay out are dumping gold on the market.

 

[Care4all]

Drudge reveals his bias. They're talking about the "Obama Panic" which is the most ridiculous idea in the world. Obama's raising capital gains taxes to where they were under Clinton. 20% over $250,000.

It's such a crock of shit anyway....

Who the hell is going to come out of the stock market with any damn gains?

we are looking at LOSSES, so capital gains will never come in to affect for the most....

this really stinks, especially if you have a 401k left in the market from an old job, where you are NOT dollar averaging by buying in to the market each month so to make back the money lost by the buys done when the stock market is down.....

I'm screwed

 

[Care4all]

it's tanking because of hedge funds....people are taking their huge amounts of money from these hedge funds.

That why you see gold dropping also....in a normal economic situation when the economy drops gold rises....however both are dropping because the hedge funds to get th emoney to pay out are dumping gold on the market.

What is a hedge fund again...?

 

[WillowTree]

Not that this has much bearing on the conversation , but why do I get the feeling that the Obama campaign is cheering the downfall of the stock market each and everytime it goes down. While today's trading will no doubt not be good given world markets and OPEC's little fit over oil prices all the more reason to quickly seek our own domestic supply. This cheering and doom and gloom though does have an influence on trading on the market and it really does seem that there has been this giddyness over this collapse, why because it helps get someone elected, I sure hope thats not the case.

That may be why they keep yelling "it's the economy stupid" worse off we are financially the better for Obama. See Democrats really do need for the poor to stay poor. Why else would they want gasoline at ten bucks a gallon?

 

[WillowTree]

Drudge reveals his bias. They're talking about the "Obama Panic" which is the most ridiculous idea in the world. Obama's raising capital gains taxes to where they were under Clinton. 20% over $250,000.

wasn't it more like 29?

 

[Care4all]

Not that this has much bearing on the conversation , but why do I get the feeling that the Obama campaign is cheering the downfall of the stock market each and everytime it goes down. While today's trading will no doubt not be good given world markets and OPEC's little fit over oil prices all the more reason to quickly seek our own domestic supply. This cheering and doom and gloom though does have an influence on trading on the market and it really does seem that there has been this giddyness over this collapse, why because it helps get someone elected, I sure hope thats not the case.

because on this post, you are wearing your partisan hat?

 

[DavidS]

wasn't it more like 29?

No, it's 20%. 5% more than what we have now for everything over $250,000.

 

[xsited1]

Today on Neil Cavuto, Neal Boortz was on with his opinion that the stock market and Wall Street are reacting to the possibility of this country possibly electing a socialist president.

LiveLeak.com - Boortz on Cavuto Talking Obama & Wall Street

 

[Andrew2382]

What is a hedge fund again...?

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

Hedge Fund


Bascially like the article says it's like a mutual fund for the super rich. To get invovled in some of these hedge funds you need a huge amount of money, 10 mill, 20 mill, 50 mill, 100 mill etc..


With these hedge funds Ibelieve every 3 months the doors open for you to take your money out, if the door closes you ahve to wait again. Well the doors have recently opened and the theory is there are a bunch of people taking their money out. That is why you see godl dropping as well, because the hedge funds aredumping gold on the market to raise capital to pay everyone out who is asking for their money. These hedge funds are unregulated so noone knows the exact numbers.

See the problems from BOTH sides of the political parties is when everyone was attacking big oilwho had a profit margin of 8.5%, no one took a look at these funds which had a profit marghin of close to 93%.