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The Great Depression's Grand Child PDF Print E-mail
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Saturday, 11 October 2008 15:05
The Great Depression's Grand Child

PEJ News -
So the markets are in free fall.  The G7 leaders have just met at the Whitehouse.   These are the leaders representing the worlds richest countries.   They are prepared to do whatever is necessary to relieve the credit crises and restore confidence so that banks will lend money.   The proposal to invest in banks in order to give them cash to lend is a start but will it work?  Eventually it will help but their is a deeper problem.  

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Lets assume you are a bank.   You have $10 million dollars available to lend but you aren't lending it because you think everything is going to get worse.   You are also waiting for the bottom so instead of lending the money you can invest it in undervalues stocks and make lots of money....much more money than if you lend it to someone else.

So now along comes the government and buys up preferred shares in your bank.   Now your bank has another $10-$20 million more so that it can now lend money.   But wait!   Why would you the bank want to lend this money out when you can make a lot more by waiting for the market to bottom and then invest in the market instead of lending the money.

Alas greed is king.   The banks are so obsessed in maximizing profit that they are powerless to relieve the credit crunch.   Even when they have confidence that the borrower can repay they will keep waiting.

So what will really work?   Instead of the governments pouring money into banks they should create a guaranteed annual income.   This would restore confidence that people can buy.   Even though banks are stuck in their circle of greed, the corporations would begin to trust that consumers would consume and begin to trust each other by extending credit to each other.   This will keep things moving and investors investing in companies which will drive up the stock markets.

There is an interesting article today in the Globe and Mail that compares the actions taken in the great depression to the actions being taken now.    The use of unemployment insurance, pension income and welfare are expected to prevent the economy from coming to a full stop today.   Unfortunately these measures only came into being after the great depression.  I would expect that the more these are padded in the immediate future the sooner the recession/depression will end.

Check out www.reportonbusiness.com/servlet/story/RTGAM.20081010.wrcover11/BNStory/Business/home
Last Updated on Saturday, 11 October 2008 15:05
 

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