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The Bank for International Settlements (BIS), warns of another Great Depression
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Orion_Zorn
post Jun 11 2008, 01:52 PM
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**skip to the bottom and read what is in italics for a simple, one paragraph summary of this huge amount of text...**

up until about 6 months ago, only fringe websites talked about this. Now The Bank for International Settlements is warning of the possibility of another Great Depression.

QUOTE
The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.


source

This seems to be a pretty strong warning, from what seems to be a very non 'Alex Jones' source. :)

That reminds me. Roark, if you read this, do you remember I pm'ed you a link to an article about a guy who claimed to have recently worked in the US Treasury that said 'the crash has already been orchestrated'? He had also claimed that he had read an email to the Carlyle Group that said "the buying opportunity will be unprecedented". If you do still have the link, could you pm it to me or just post it here?

I am interested to re-read it. :ph34r:

The banking debacle is insane. From what I have read, this would not happen if money had some sort of backing. In a non Keynesian system, if people don't borrow money, the supply of money at banks becomes large, so they will lower interest rates to entice people to borrow. If people start to borrow a lot of money, the supply gets smaller, and banks increase interest rates. Our current system though, has no such constraints. If people are borrowing money like crazy - like they have for 20 years - the Fed can just... keep interest rates low. This encourages borrowing, and not saving. The problem with this is that is causes malinvestment (quoting Ron Paul's latest book).

The example I use is about a guy back in the late 1990s, who received 9 million dollars to create 'Barbeque.com'. His business model? "I like to barbeque." There was so much money bubbled up in the late 90s that investors needed to put it anywhere, so they made *bad investments*.

When money is 'cheap' people do stupid stuff with it. The way a system would work (from what I have read) that used finite amounts of money (money that is backed by something, like gold) would push investors and businesses to be more cautious. They would be encourage to invest wisely, because they might not need to borrow money 'cheaply' in the future. This would restrain growth from getting too fast.

In our system today, the cheap money makes it seem that we are prosperous, but it is a false prosperity. The correction has to come at some point, and the article above points to what I have read 100 times over the last year or so - the central banks have been holding off a real correction for too long, but eventually the correction will come. In a non-Keynesian system, the corrections would happen more often, and be smaller.

What is most interesting is that the result of all this turmoil is that the government wants to give the Federal Reserve MORE control of our system. Amazing. It's like letting the fox into the hen house and then when the hens die, saying 'well we should give the fox a gun, so he can protect those hens better!'

And sadly when/if the crash comes, people will look to our government and financial system to 'do something', not realizing they are the ones that caused it.

The summary is that it appears that the laws of economics are going to come down hard on us and cause another Great Depression. This is NOT caused by deregulation like people say, it is caused by deregulation *of a broken system* that does not let the real market keep things relatively stable. It's not just Bush's fault, the whole system is broken.

I'll go beat my head against the wall now, people on both sides are too busy arguing over the question of whether or not a fist jab makes Obama a terrorist or not to pay attention to real problems. :(

This post has been edited by VnX_Zorn: Jun 11 2008, 01:55 PM

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Orion_Zorn
post Jul 1 2008, 01:37 PM
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This post ended up being too much of a rant. Does anyone have any thoughts on the possibility of a big crash?

It is starting to appear more often.

The Royal Bank of Scotland is warning of a crash:

http://www.telegraph.co.uk/money/main.jhtm...C-mostviewedbox

Another link on the Bank of International Settlements warning of 'the worst crash in 150 years'

http://www.abc.net.au/news/stories/2008/07/01/2290403.htm

QUOTE
"The statements in here are talking about comparisons to the 1920s depression and is actually pointing fingers at central banks and their policies and their misunderstanding of how the financial system works and their love of the new-fangled things that have brought the world to the precipice of what could be one of the most major financial catastrophes in the history of economics," Satyajit Das said.

[b]He adds that he has never seen a report as dire as this from a global economic agency.[b]


I guess to me this take the phrase 'Elephant in the room' to new heights.

I think the problem with people in general is that they are reactive, and won't act on dire news without major proof. (I think this IS dire proof, but whatever).

A year ago I asked my father about setting up a woodstove in my house, to offset my fuel oil furnace. he laughed.

Today on the morning news they said fuel oil is will probably be $2 more a gallon than last year. Since everyone seemed to think I was nuts for wanting to buy a woodstove, I doubted myself and didn't buy it.

Now my dad isn't laughing anymore though.

Let's put it into perspective. If this crash happens like they fear, we won't have this site to finish the discussion on, I think. i'll miss my booby sig. :(

Also, Seymore Hersch thinks we are closer to war with Iran than most people think:

http://www.npr.org/templates/story/story.p...860&ft=1&f=1001

And Ron Paul has stated that if we declare war with Iran we could see energy prices triple

http://www.presstv.ir/detail.aspx?id=61795...ionid=351020101

This post has been edited by VnX_Zorn: Jul 1 2008, 01:46 PM

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Roark
post Jul 1 2008, 02:25 PM
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The most interesting part of these two posts imo is:

QUOTE
The correction has to come at some point, and the article above points to what I have read 100 times over the last year or so - the central banks have been holding off a real correction for too long, but eventually the correction will come. In a non-Keynesian system, the corrections would happen more often, and be smaller.

I think that is correct to some degree, and incorrect to some degree. It seems to assume that all (or most) investment carried out under fed-set lower interests rates that wouldn't be carried out under market-set interest rates is malinvestment. And that's just not the case. A poor investment is a poor investment regardless of the availability of wealth. Does a bubble depend on interest rates? Sure they are somewhat supported by it, but the root cause is still hype and inexperienced investors (see: tech+housing). These bubbles have to pop. The corrections are inevitable, because a market can't support such poor estimations of value for very long.

The stock market run-up of the 20s was one of the main reasons Keynesianism became popular with the Fed. It saw a long, unchecked bubble grow huge and then pop at the end of the decade. Then they saw all the runs on banks and bank failures that occurred as the depression took hold. The whole point to Fed policy now is not to GROW bubbles by flooding the economy with liquidity, but to pop them silently. By lowering interest rates and motivating new investment, they hope to have new growth created while the bubble pops. The aim is for overall stability, and near-to-full employment while various sectors purge their "fake" assets.

So I'm not sure that you are right that without Keynesian Fed action, bubbles would be common and small. The 20s seems to directly contradict that. Our recent bubbles, that you attribute to keynesianism, have also been pretty weak by comparison. So I don't know, both sides have pluses and minuses.

This post has been edited by Roark: Jul 1 2008, 02:28 PM

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Orion_Zorn
post Jul 1 2008, 03:54 PM
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Well the more I read, the more complicated it seems to get. Murray Rothbard said that contracting the money supply during the Great Depression was the only thing that ended it, but Friedman said, if I am not mistaken, that contracting the money supply made it worse.

About the malinvestment, from what I have read, low interest rates just promote more malinvestment.

Maybe I am wrong, but when I say 'Keynesian' I mean the idea that there is no limit to the supply of money. When Nixon closed the gold window (iirc, some of these things I read months and months ago) he said 'We are all Keynesian now'. I take that to mean that there is no backing to the money, and nothing to stop banks from lending like madmen til... doomsday.

In an economy that had a finite money supply, they would raise interest rates as people started to borrow a lot. House prices could not have skyrocketed *as badly* if the money supply was put on a short leash, would it not?

People could still invest badly, and overpay for a house, but as interest rates rose (as the supply of money became smaller) home buying would slow too, and prices would not climb so high, since there would be less buyers, etc etc.

The sites I read say that buy keeping interest rates low like you said, they have just adding more fuel to the next bubble each time they do that, adding more and more money to the supply.

I have also read that the 1920s were a result of flooding the money supply to pay for ww1. 'wartime inflation' seems to be a common policy amongst every government, keeps morale up, because people don't see tax hikes, etc. It would seem that they inflated the currency during the war, and then the bubble popped years later.

And notice that in ww2, people gave up things for the war, there was a boom period, and then bad inflation/recessionary period.

http://en.wikipedia.org/wiki/Image:US_Hist...l_Inflation.svg

Maybe I am wrong, but it seems obvious the government inflates during wartimes. When was the last bad recession? Not long after Vietnam, where we dropped more bombs than we did in all previous wars combined. ($$$)

And now we *lower* taxes in time of war? Isn't that just amazing? It's like telling your boss you want to work 20 hours a week instead of 40, and then going out and buying a new house and partying all the time.

To me, it seems obvious that since war has gotten less popular (people accepted rationing during ww2, but would even the most staunch war supporters have gone without some things for Vietnam?) the government is relying on the silent tax of inflation to pay the debts.

who knows, the beauty of the system imo is that you can have two great economics completely disagree on a big issue (Rothbard and Friedman on the Depression)

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Roark
post Jul 1 2008, 05:42 PM
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My understanding of Keynesian policy is the Fed using interest rates to pump liquidity into tight markets in order to prevent further troubles and spur the economy back into activity. Then they raise interest rates when market liquidity is no longer a concern. It's supposed to be a stabilizing tool, which is why I question people who make the claim that it is always destabilizing. I think it CAN be good, by preventing huge runs like those that brought on the great depression. It can also be bad... I think the best argument of the Austrians like Paul, Rothbard, Hayek, etc is that the Fed leaders are appointees, often hacks, who may or may not know what they need to know to make the right decisions. There is no accountability, and they hold an enormous amount of power.

QUOTE
About the malinvestment, from what I have read, low interest rates just promote more malinvestment.

Sort of. Low interest rates promote more investment, period. And to that extent, some of it will be an increase in malinvestment. But there's no reason why people are more apt to throw money away just because interest rates are low.

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Orion_Zorn
post Jul 2 2008, 03:27 PM
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From what I have read, low interest rates cause a false prosperity. We think we are wealthier than we really are right now. If interest rates were higher, businesses would be more careful when borrowing to expand, and less people would put their money into the stock market because they could make a good return putting their money in a bank, and have no risk at all.

Look at my example on bbq.com. Would that(those) investor(s) have been so careless if we did not inflate the currency?

Anyway, I found this just a few minutes ago.

QUOTE
Ludwig von Mises wrote in 1919: "One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier."

In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn't have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars - or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher - perhaps $20,000 per household.

These days, the American consumer has been hit very hard with rising prices in oil, clothing, food, and much else. For the first time in decades, people are feeling this and feeling it hard. And just as in every other inflation in world history, people are looking for the culprit and finding all the wrong ones. They believe it is the oil companies who are gouging us, or that foreign oil dealers are restricting supply, or that gas station owners are abusing a crisis to profit at our expense.

It is long past time for us to take note that the cause of the real trouble here is not the manufacturers, or even the war as such, but the agency that has been granted a legal right to counterfeit at will and lower the value of the currency while fueling every manner of statist scheme, whether welfare or warfare. We need to look at the Fed and say, this is the enemy.


Would people have gone into Iraq if Bush had said 'Hey, I need $5000 from every household to save the Iraqis!'

Helllllll no. We wouldn't attack anywhere if Presidents could only pay for war with higher taxes.

Not that all of our oil problems now are caused by inflation, but much of our price increases are from inflation, yet few people understand it. Where I live, every single person I talk to about prices thinks that 'gas going up makes everything more expensive.' And this is why the government goes the inflation route: people just assume rising prices is a natural thing. No one even asks how we pay for Iraq, they think it comes from the taxes we already pay! With a budget deficit *before* we went to war... My god I would have said the same thing back in 2003. Amazing. It's really amazing.

This post has been edited by VnX_Zorn: Jul 2 2008, 03:29 PM

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Orion_Zorn
post Jul 29 2008, 09:03 AM
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http://www.lewrockwell.com/rothbard/rothbard183.html

If anyone is interested, this is by far the best article/essay I have ever read about the so called business cycle, inflationary policies, free market economics, etc.

Possibly we will find out if Mises was correct. He stated that government intervention in the Depression was what caused it to last so long and be so damaging. It looks like the government is doing the same thing now.

also this article is pretty interesting, written by a Venture Capitalist/Hedge Fund Manager.

http://billburnham.blogs.com/burnhamsbeat/...e-maes-gol.html

He claims that the reason Fannie Mae is in so much trouble is because it was/is a 'quasi-government agency'. People had more faith in Fannioe than a typical banks because they felt the government would fix any problems it ran into. He also shows how the fannie scheme, and why they got into trouble. Hard to say how reliable this is though.

lastly, this is an amazing chart.

http://ft.mirror.waffleimages.com/files/99...8d9b376879a.gif

This housing bubble is like no other.



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