But here's what I'm struggling to grasp: if we don't pass the bailout plan, is this the beginning of the next Great Depression? How is this situation like that one? How is it not? Like any 21st century citizen would do (except maybe John McCain), I Wiki'ed it. Sadly, I found, history is not necessarily our teacher:
Scholars have not agreed on the exact causes (of the Great Depression) and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The (overriding) question is whether it was largely a failure on the part of free markets or largely a failure on the part of governments to curtail widespread bank failures, the resulting panics, and reduction in the money supply. Those who believe in a large role for governments in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem(1).
This provided some insight but didn't make me feel better:
Debt is seen as one of the causes of the Great Depression, particularly in the United States. Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression: in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default.
Isn’t this what’s happening in the housing market? There's a school of thought that says, "(a) key cause of the Depression was the expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom." David Brook's writes today in The New York Times, "We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike." So the money sloshed into the housing market creating a credit-driven boom and now it's sloshed out. Okay, I'm catching on.
The good news is that it seems we have learned one important lesson from the Great Depression - that closing ranks (e.g., tightening money supplies or limiting trade) doesn't work, as most people agree on one thing - the market needs a massive injection of capital to offset the slosh-out, as it were. Which essentially means that we agree that not providing the necessary capital would lead to a serious downward spiral. Free market types would just prefer that capital come from the private sector versus the US taxpayers - a commendable viewpoint, but hey, there's a kink in the IV line and that private capital ain't flowing!
Whatever you see as the underlying cause or the fix, think of the bailout as patient stabilization at the scene of an accident. It's a bandaid to stem the bleeding, followed by a bumpy ride, until the surgeons can more fully assess and address the problem. And even then, it's a wait and see game until the patient is on his feet again, with some tinkering to get the meds right or fight off infection.
Maybe after this, we'll all think a lot more about preventative care.
(1)All references, except where noted, are from http://en.wikipedia.org/wiki/Great_Depression
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