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Monday, September 29, 2008

...and it didn't so it is the 20th Amendment revisited.

There was a time when the presidential inauguration was in March and not January. During Roosevelt's first term, the 20th Amendment was passed and the inauguration was moved to January. This was done so that the "interregnum of inaction" that happened from November 1932 until March of 1933, when the Great Depression really melted down, could be avoided. Hoover wanted Roosevelt to do things on his terms...Roosevelt wanted no part of it...and the economy exploded. The 20th Amendment was designed to shorten such things.

Well, I just read that the bail out failed. The good peeps of Congress don't want to have to vote for it and then go back home and explain it to their constituents. OK, fair enough (Ah, true Leadership! Worried more about your job in Congress than the survival of the real economy {correct thoughts of Phil Rothman}). But the election is 5 weeks away. Would you like to guess what can happen in 5 weeks with inactivity in trying to correct this meltdown?

What are you going to say when the unemployment rate passes 10% and they are out of a job? What say you when you realize Macroeconomics 101 says a credit market is an essential ingredient for a functioning and growing economy? I'll say it again. Financial crises get messy and become non-linear very quickly. If you don't think the above is true, then as James Hamilton says, "you'll have a chance to test your theories real soon."

16 comments:

DNICE20ECU said...

Question for you:

I was taught that the market will always correct themselves, if I remember correctly. I can understand how the bailout would ease the pain of this pending recession/depression. In theory if the financial crisis were left to its own doings the depression could be deep and take a heavy toll on not just the financial institutions but everyone as well. It seems it would also teach everyone and the financial institutions from recreating this same mistake. Why should we unleash 700 billion dollars to prolong the pain? With the bailout people who could not afford to have a home, but aquired one under the CRA community reinvestment act will receive help and not lose their home after not paying for their mortgages. I am not clear on the benefits of the people who continue to pay their mortgage on time, except for the speculation that we could ward off some difficult times. Just trying to see the whole picture here.

Randall Parker said...

You do not throw millions upon millions of people out of work to teach someone a lesson. Let's stop the economy from hitting the wall and then start the lesson. If you want the pain to make those responsible pay you can have it, but boy is it gonna be expensive. Moreover, it is not at all clear to me the final price will be anywhere near $700 billion. Anyway, you don't chop off your child's fingers to get them out of the light socket. That will teach boy! Nay nay, pop the circuit breaker, start fresh and then sit down and have an Uncle Jed to Jethro talk.

Andrew_Grodner said...

Well, Dr Parker can put it best in economic terms, but if I could use health analogy, my take is that there is a big difference between extreme pain or being critically ill, and being DEAD. If the patient is still alive there is always a potential for recovery. But when someone is dead, that's it, you cannot bring someone from the dead.

Another words, credit is the blood of the economy and if it does not flow, the patient is dead, which means that the economy stalls. The bailout is designed to make the blood flowing again, be the blood be infected, but flowing. So it is a misconception in my opinion to call the bailout a "rescue" plan, it is more like a "revival" plan because currently the blood of the economy, credit, almost stops flowing ...

Randall Parker said...

In other words...

DNICE20ECU said...

What evidence is there that there will be millions and millions of jobs lost? Some, yes but I do not believe that it will be as big as you think. As for the fingers in the light socket analogy, seems to me that the government has consistently allowed us to stick our fingers in the socket (Frannie, Freddie, CRA). They now want the 700 billion dollars to rewire the whole building and move all light sockets 8 feet off the ground to prevent the little wandering fingers. If the bailout could be restructured so that we can just plug the sockets, so that the kids don't get their fingers shocked the taxpayers will be much better off.

What do you know the sun came up today, and the market is improving upon yesterdays loss.

Have a nice day folks..

Derek Pszenny said...

Somebody plese give denise directions to the soup kitchen

DNICE20ECU said...

Derek Pansy! If you can't at least have an intelligent discussion, do me the favor and LEAVE... I am just expressing ideas in an intelligent fashion unlike you.

Derek Pszenny said...

Denise my request for the soup kitchen directions was actually well thought out and intelligent. You should visit the soup kitchen in your town so you can see how bad those people have it. Then estimate the number of people you think might end up in a place like this under the do nothing plan you propose. I am a free market guy too but the cost of doing nothing will be steep and prolonged (sorry I had to put you on the defensive to get you to envision the devastation that could be caused).

DNICE20ECU said...

Derek -

First off my name is not denise (reason for defensiveness)

2nd - I have worked in the financial industry for over 7 years, and have become a statistic to this whole crisis. I know my way to the soup kitchen per se'

3rd - Offer a difference of opinion with a reasoning behind it. Seems you are blogging just to insult. You have no credibility until you can put reasoning behind your thinking.

So, sorry for the defensiveness.

Have a nice evening...

Andrew_Grodner said...

Hey guys, keep it clean here please. I think it is a nice blog so let's just focus on the economics. Otherwise Dr Parker will not comment and I think it is always intersting see what his opinion is. After all, he is an expert in Great Depression we seem to be on the brink of the Great Depression II.

Randall Parker said...

Hey groovy guys and groovy girls, like Rodney King said, "Can't we all just get along."

Randall Parker said...

And anyway even if your name is not Denise, Denise is a lovely name and I think Pansies are beautiful flowers. Play nice in my play pen. Be kind and considerate to each other. The good doctor is watching. Don't make me get my stick.

derek pszenny said...

przepraszam

Andrew_Grodner said...

dziekuje za zrozumienie!

For those who may not recognize Polish, here is the translation:

"przepraszam" - I am sorry

"dziekuje za zrozumienie" - thanks for understanding.

Derek - thanks for bringing up Polish language, arguably the most beautiful language in the world! *SMILE*

derek pszenny said...

dnice20

I met with a close friend and investment advisory client yesterday. His firm is in the health care business and he employs of over 50 people in eastern NC. His firm is very successful and monthly revenue is substantial to say the least. Almost 100% of his revenues come from insurance and Medicare reimbursements. These reimbursements come about 60-90 days after services have been provided. As a result, his operating cash flows come from a line of credit at the bank. His bank has advised him that they may not be able to continue extending him the credit that he has continuously used and consistently paid in full each month. Should his line of credit be cut off it will be difficult or impossible to make payroll on time, pay taxes and restock inventory.

Why can’t the bank make continue to make the loan? Could it be because of accounting rules that make the bank undercapitalized? Is the bank concerned that customers will flood the bank looking to make large sudden withdrawals like WaMu?

What will happen to this health care firm, its customers and employees? Are there many other firms in the heath care industry in the same position?

Is this a credible enough real world example for you?

DNICE20ECU said...

Derek -

That is a great example of what is going to happen in the real world. I do believe that there needs to be something done for companies such as the one you mention. However the current bailout proposed is laden with excessive junk. This bill is giving back way too much money to the exact people who created this mess. On top of that there is no guarantee that it will not happen again. This bailout is preventing the necessary failure of some financial institutions. I would like to get a better clarification or understanding of how they believe that the American taxpayer will be able to make this money back. What are we going to do next year this time when the housing market still stinks, unemployment is still high, the markets performing badly b/c of that, and on top of that having over 1 trillion in debt?

As I have stated before. I know there will be some huge pains if this bill does not pass, as I am already experiencing that pain myself (wachovia). I do feel that if we pass this bill, that we will have much more pain in the future.

This is good stuff! now we are talking..

have a good day...