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GK

I think we need to write a children's book on how to value businesses as it seems to have been lost on the public.

If the interest rate is 0% (no discounting of future earnings), then the value of a lemonade stand earning $100 a year for 10 years is ... duh ... $1000

The price earnings (P/E) ratio is $1000/$100 = 10.

As input prices go up and people stop buying, earnings of DJ stocks are going to go down and stock prices should go down.

But I am not sure where Mogambo gets his P/E ratio numbers. The DJIA P/E seems to be around 15 which does not seem unreasonable.

http://www.djindexes.com/mdsidx/ index.cfm?event=showAvgStats

by The Mogambo Guru

There are signs of stupidity and panicky desperation everywhere, such as the Dow Jones Industrial Average index going up last week when earnings fell to $132.14 from $146.15! Earnings went down, but the shares went up because there were more buyers than sellers! Hahaha!

If you think that the fall in earnings to $132.14 from $146.15 is a lot, then congratulations! You are right! It is a huge loss of 9.6%!

So, earnings fell almost ten-freaking-percent, yet the underlying stocks went up? Hahaha!

=========

In case you are not impressed with a 10% fall in earnings, maybe you will be impressed that as a result of earnings falling and prices going up, the price-to-earnings ratio is now a stunning 87, when the long-term average P/E for stocks is about 12, and where stocks usually top out at a P/E of about 21! Hahahaha! Who are these idiots buying these stocks?

Elaine Meinel Supkis

This does make no sense except for one item: the trade deficit! They have to get rid of the dollars because not everyone is holding dollars to make their currencies artificially cheaper, only Asia is doing this!

No, Europe and OPEC as well as all our other trade partners like Canada and Mexico have to park their loot somewhere! Stocks are where.

anthony

They are not going to stabilize the economy as long as average folks don't have money.

gas price - unemployment - lead to declining house - lead to busted construction sector - banking - retail ... etc.

They really have to start where it begins. stop agitating oil price. stabilize the banking, then start carefully pouring money where it needs.

instead they are just throwing money every which way drowning everybody with inflation.

and they are doing it harder each year. (look at the budget. more war spending, more bail out, etc)

Ed-M

Plus workers are being herded into mutual funds to save for their retirement in IRAs, Roths, 401Ks and the like.

JT

I wonder,

70% of US economy is based on internal consumption. And most profits are still kept by US Brands/importers/resellers.
Perhaps not the case with Japan (Toyota) but concerning China at least.

So isn´t blaming Japan and China for trade deficits a bit like blaming McDonald´s for being fat or U.S. Sugar Corp for having diabetes. Or blaming your first class teacher for being stupid :).
Blame your own management (Washington and master chimp).

I apologize for being mean (I´m in a bad mood, trying to install a new server for one of my customers at the moment).
But hey, I sent 2000 € your way today. 1500€ to HP (500€ to China for production?) and 500€ to Seattle for the OS.
So trying to help :), to balance things. And I bought a Weber charcoal grill last week that´s still made in US I think.

One request though could you guys pls elect Obama. Maybe all of us are screwed in the western world and it won´t change anything.
But it would feel nicer to drive off the cliff in the same car. A bit like Thelma and Louise in an old convertible, you know.
But without the GWB and JM cow horns on the hood of the car :).

ralph

Dear Elaine,
I found this online. Do you think this has any merit. Or is it lame. Please read the following........ Mr. Williams was told that over the next twelve months, from mid-2008 to mid-2009, (1) news of super giant oil fields, ready to produce, would be announced for two locations, in the Northern Slopes of Russia and in Indonesia, which oil fields would together contain more oil reserves than the entire Middle East; (2) that this news would drive oil prices down to $50/barrel; (3) that OPEC countries, especially in the Middle East, would be bankrupted by this price decrease; (4) that this would cause the financing of our foreign trade and current account deficits through purchases of treasury paper by foreign nations with their surplus oil profits to collapse, leading to the collapse of the dollar; (5) that the collapse of the dollar would cause unprecedented financial strife and turmoil in the US, and that it would take many years for the US to recover from this financial debacle; (6) that they (big oil) support John McCain for President; and (7) that US domestic oil reserves would never be tapped, and that any legislation which might allow domestic reserves to be tapped would not be allowed to pass, leaving the US dependent on foreign oil forever.

DrKrbyLuv

I wonder how much Japan and China are using their T-Bill leverage to deter the US from further exploiting Iraq and Iran. They seem to be in the drivers seat in that either or both could be privately advising Washington that further transgressions would trigger heavy T-Bill trading, which would be the death knell for the dollar.

An interesting theory, put forth by Jerome Corsi in his book "The Late Great USA", is that a failing dollar may be deliberate to push the people to accept the "Amero" (or some other new currency that will be common to the US, Mexico and Canada). Thus, forming the North American Union.

If China could be blamed for the collapse of the dollar - via T-Bill dumps, all the better.

G.

Oh Pooowah Libwulz of America !

Hold on tightly to the coat-tails of the
Audacious One. You will surely get a
Magic Carpet Ride to the Kindom of Hope.
Where the bluebirds sing next to the lemonade
springs. And the Big Rock Candy Mountain
will have an inexhaustible vein of choir
music and good TV campaign commercials.News
anchors will once again have good reason for
their expensive facials and hair styling.

Oh Lord when are Americans going to learn
that there can be no positivity without
some negativity (ie,hell raising--Elaine's
observations on "balance" here)

When are we going to go for some frumpy
negative person with occasional 5 o'clock
shadow that says real things rather than
some blow-dried piece of make up velvet art.

Throw your two party system in the river.
It died years ago when the DLC took over.
Cant you smell the corpse ? Your clothes
stink from being too close.

I'd recommend going to the Arboretum this
wknd and see the fabulous "corpse flower".
Its blooms are the largest in the world and
only blooms once in its life. The smell is far more worthwhile putting up with than
hanging around with most Democrats.

Jojo

All conspiracy theories lead to concentration of wealth and power in the ambitious hands of the aggressive to the loss of those that share the qualities of being timid and trusting.
The hope is the belief that there is intercession from an invisible hand, a ninja-like hand not bound by logistics and time or self-serving justifications - This avenging dexterous appendage of justice will somehow serve it's people and lift them up.
There are those that argue that the hope of there being a higher force of cosmic justice is a drug that inhibits human rage and agitated action at the injustices that are inflicted upon them.
So, it seems to me that if the undefined, miracle induced hope of justice prevents the meek from taking hold of injustice and choking the power out of it - then hope is a conspiracy.

Jojo

All conspiracy theories lead to concentration of wealth and power in the ambitious hands of the aggressive to the loss of those that share the qualities of being timid and trusting.
The hope is the belief that there is intercession from an invisible hand, a ninja-like hand not bound by logistics and time or self-serving justifications - This avenging dexterous appendage of justice will somehow serve it's people and lift them up.
There are those that argue that the hope of there being a higher force of cosmic justice is a drug that inhibits human rage and agitated action at the injustices that are inflicted upon them.
So, it seems to me that if the undefined, miracle induced hope of justice prevents the meek from taking hold of injustice and choking the power out of it - then hope is a conspiracy.

WTO_WHO

WTO talks collapsed... heavy dollar buying(by whom, ahem ahem)...

Gary

How can I be against hope? I'm only against
the new version of "hope" (regTm)

You can be hopeful if you're part of a movement that is attempting genuine change
rather than a coreographed "movement" that is centered around "hope" and other pious
sounding noises.

Out of negativity comes positivity. When negativity is driven out of the system
positivity becomes sinister--like the movies with the "clowns-gone-wild" killers.

I always have a little hope when I go into
the booth and crank on the handle that says
Nader or Ron Paul (maybe)

JZ

America's house price time bomb

By Michael Robinson
BBC World Service

With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide.


The intervention would come as a little known quirk of US law threatens to drive down house prices even faster.

Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.

In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank.

By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less.

So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.

"I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense."

Take the hit

As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded.

Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment.

Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."

Over to the bank

In California and much of the rest of America, there is a powerful incentive for homeowners such as Ms Trainer to walk away from their mortgage obligations.

Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes.

Consequently, by walking away from her apartment, Ms Trainer has also walked away from the $200,000 loss on her property.

Her bank gets stuck with that.

Unthinkable option

Traditionally in America there is a social stigma attached to those who default on their debts, which should be a deterrent to walking away from your home.


But according to Susan Wachter, professor of real estate and finance at Wharton School of Business, in the depth of this crisis the social attitudes to such actions are changing.

"This is the kind of conversation that's going on at cocktail parties, at swimming pools," Professor Wachter says. "And suddenly this option which was truly unthinkable in the past becomes thinkable."

Worrying development

Ms Trainer says she feels no moral obligation to go on paying a loan on a property that is going to go on losing her money. She says her friends support her decision.

"I think people are taking a more cold-hearted look at it," she says.
"Is the bank going to pay for my retirement because I was a good girl and paid my mortgage, even though legally I didn't have to?"

Professor Wachter believes that, to date, most people have had their homes repossessed because they could not manage the repayments.

The trend of people now positively choosing to walk away because it makes financial sense to do so is a worrying new development.

"The dangers are extraordinary," Professor Wachter says.

"If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation".

No renegotiation

In the city of Stockton - the foreclosure, or repossession, capital of the US for 2007 - estate agent Kevin Morgan sells repossessed houses on behalf of the banks that now own them.


According to him, walking away has become commonplace.
"I would say it's probably 70% of the volume of our foreclosures right now," he says.

"It's a business decision for their family that the smartest thing they can do is walk away from their home."

As a sign of the changing times, some 60% of borrowers do not even bother to contact their banks to attempt a renegotiation of their loan, Mr Moran explains.

"They stop paying and they stop talking," he says. "They just plain walk away."

Total disaster

It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.

But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.

"This is becoming a tsunami of voluntary defaults," Professor Roubini says.

"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.

"You could have most of the US banking system wiped out, so this is a total disaster."

Which is why it is not just US policymakers who are hoping America's new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.

Because if it fails, the economic fallout could be felt far beyond America's shores.

Michael Robinson's two-part series "The Trouble with Money" is broadcast on 30 July and 6 August on BBC World Service. You can hear the programmes online by going to:

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7529277.stm

Published: 2008/07/29 08:29:55 GMT

© BBC MMVIII

Elaine Meinel Supkis

Well, guess what? The Japanese carry trade took off again today. And the yuan and euro are weaker against the dollar. EVERYONE who has a trade surplus with the US, Asian, European, African and the other Americas, all are working in union to increase the value of the dollar and continue the US giant trade deficit.

They will be sorry for this. Even if they sell us things as cheap as humanly possible, with out the Home ATM machines cranking out endless fake money, the US consumer will be hitting the highest possible debt limits at the credit card usury level.

As I keep saying, the last 35 years status quo and especially the 2002-2006 status quo is the global ideal. And we are being killed by it.

DrKrbyLuv

Interesting post JZ

Gary

Instead of INCOMES our economic hucksters concentrated on
cheap credit. Concentrating on incomes would've become a
threat to their power and priviledge and also would've required
some real work on their part. It would require a nation of engineers rather than a nation of PR hacks and lawyers.

Our economy now resembles one of those con-job booths at a travelling Carney. Years ago I got suckered by one of these for
a decent sum of cash and never went near one again. Now we have a whole nation of these fatty palmed douchebags that never flipped an honest dime in their lives.

Moral Hazard ? Hell, we left that quaint idea long ago when
we booted out the decent intelligent Jimmy Carter and coronated
a 3rd rate Chimp actor and world class snitch Saint "GE Theater" Reagan. From then on it was let the blood and money flow.

Family Values, Myass ! The Patriarca family had more values than
Govt Banksters..They only wacked their own kind and on top of
it, they gave us the best restaurants in Providence.

cigar

Elaine,

What tells you the carry trade starts or stops?I know we should see the yen move lower and stocks move higher when the carry trade is on and vise versa when it unwinds, but what else do you look for?

Roberto

Naomi Klein just divulged, during a Free Speech TV interview by Democracy Nows Amy G, that she'd just been to China, and a 2 (medium) city experiment was in progress to outfit those burgs with ungodly amounts of video cams (beyond the creaming fantasies of the most nationalistic brit control freaker) to see how they might control the currently out of control migrant labor population they fear most there. And today Global BC, a station we get on the airwaves here in very NW Washington state, fronts a story of how western kinda folks are freakin about a Chinese ogvt directive to monitor all e-mail messages coming out of the chinese olympic village.... YA THINK????
As EMS has often said.... they're a communist dictatorship folks. No "trade partners". So get over it.

Michael

JZ - Some observations about mortgages from someone who has been both a housing borrower and lender:

There's a reason for that Depression-era legal change letting people walk away from mortgages (rather than still owing the money).

Prior to that legislation, the typical loan (for mortgages and everything else) was relatively short-term (5 years or less - no 30 year mortgages), and it was "callable," meaning at ANY MOMENT OF ITS CHOOSING the lender could demand full repayment of the entire principle. Typically, failing to make one payment on time automatically led to the loan to being called (unless you were a rich borrower with a personal or business relationship with the lender).

There were countless personal tragedies that happened when the economomy tanked and people couldn't make their payments on time, and a massive housing price deflation (even worse than the current one) resulted when the banks repossessed all the farms and homes where a payment had been missed and the banks had to resell the property.

And, prior to the new legislation, in some cases the dispossed property owner STILL OWED MONEY on the property that had been taken (collecting this money was impractical in most situations). This was one of the disasters that started on the farms in the 1920's and led to the severity of the Great Depression.

Think about it logically: Under a mortgage, the house is put up as collateral, and if the mortgage is defaulted the lender takes possession of the house; in other words, the lender has regained the value of their loaned principle (plus the invested down-payment) when they respossess, and shouldn't need further payment.

It's not the mortgagee's fault if the lender didn't demand enough down payment and/or accepted (even encouraged) a grossly over-valued assessment so that the biggest loan possible could be made (and the biggest profits possible garnered from the loan process).

The generation in the 1930's that put in place such financial regulation for the protection of the American worker, investor, and consumer was much wiser than the generation of the 1980's and 1990's that did everything possible to remove all protective regulations.

Elaine Meinel Supkis

Actually, Michael, many a seller and real estate agent conspired to create loans on top of everything else so buyers with no savings and no down payment could LIE to the bankers and claim, they had a down payment! I said several years ago, 'This is fraud.' People who honestly had real down payments were forced to bid against people who were putting $0 down! This drove up the price of all houses.

There were lots of very bad things going on during the housing bubble.


And LA had a shake up moment today: there is, in the not very distant future, a huge earthquake event just itching to turn central California upside down. Half a trillion in damage, anyone?

Greg

Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu


It was just 5 days ago in Death Spiral Financing at WaMu, Merrill Lynch, Citigroup that I wrote about ratchet provisions and how they would bite companies that agreed to them. Here is the key snip:


The investors in the equity raise would have their investment protected by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free.

It doesnt take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral.
As expected, Merrill Lynch needed to raise capital again. And this one hurts because Merrill previously agree to ratchet provisions. Inquiring minds may wish to consider Merrill to Sell $8.5 Billion of Stock, Unload Money-Losing CDOs.

Merrill Lynch & Co., the third biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Temasek Holdings Pte., the Singapore-owned fund that became Merrill's biggest investor by acquiring shares in December, will buy $3.4 billion of the new stock, Merrill said yesterday in a statement. The New York-based company is paying Temasek $2.5 billion to offset losses on its earlier investment.
My Comment: That $2.5 billion is because of ratchet provisions. Mother Merrill is really only raising $6 billion.

Almost $19 billion of net losses in the past year forced Merrill Chief Executive Officer John Thain to backtrack from assurances that the firm had enough capital to weather the credit crisis. Since taking the post in December, Thain has raised $30 billion in an effort to keep pace with mounting charges on mortgage bonds amassed by his predecessor, Stan O'Neal.
My Comment: The market cap of Merrill Lynch is $23.97 billion. Mother Merrill has raised $30 billion since December. It is taking herculean capital raising efforts to keep the good ship Merrill afloat.

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.
My Comment: Desperate mothers do desperate things, such as provide 75% of the financing to sell CDOs at 22 cents on the dollar.

Thain's Track Record

In December and January after raising $6.6 billion each month Bloomberg quoted Thain "We're very comfortable with our position. We could have raised substantially more money. We turned people away.''

In April he sold $2.55 billion of preferred stock.

On July 17 in a conference call Thain said "We believe that we are in a very comfortable spot in terms of our capital."

Now Thain is back at it again, selling $8.5 billion in stock but only netting $6 billion in cash from it. It will be interesting to see how long it takes before Thain is back at it. One thing we can assume is that this will not be the last time Thain needs to raise cash, no matter what Thain says.

One good thing for Merrill is their Press Release shows Merrill is no longer exposed to those death spiral ratchets.

In satisfaction of Merrill Lynchs obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.
Washington Mutual Ratchets

A quick check shows WaMu's market cap is $6.71 Billion. It's share price is $3.95. TPG bought $7 billion of stock at $8.75 with a ratchet provision that if WaMu raises more than $500 million in equity, WaMu has to pay TPG the difference. The odds of WaMu not needing to raise capital are slim and none. Washington Mutual is in deep trouble over many things, and those ratchets make matters worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu
Posted by Michael Shedlock at 1:02 AM Print

RobG

Bloomberg: "Freddie, Fannie: The situation is much worse"

Forget everything you've read about how woefully undercapitalized Fannie Mae and Freddie Mac are. The situation is much worse. ... snip ...

Using the methodology described in Fannie's footnotes, I was able to estimate that about $14.3 billion of that $15.2 billion differential came from adjustments to the company's deferred-tax assets. The way this works is the company calculates the tax effects on the difference between its shareholder equity at fair value and under GAAP; it then includes these in other assets.

Without that $14.3 billion of tax adjustments, the fair value of Fannie's net assets would have been negative $2.1 billion, by my math. Exclude deferred-tax assets entirely, and it would have been negative $19.9 billion as of March 31. (Fannie raised $7.4 billion of additional capital in May.)

As for Freddie, it showed $16.6 billion of net deferred-tax assets under GAAP as of March 31. Like Fannie, it put deferred taxes in "other assets" on its fair-value balance sheet. Freddie said its other assets had a GAAP carrying value of $31.6 billion and a $42.5 billion fair value.

By my calculations, using the methodology in Freddie's footnotes, it looks like Freddie wrote up the deferred-tax assets on its fair-value balance sheet by about $10.1 billion. So, take out the tax write-up, and Freddie's net assets had a fair value of negative $15.3 billion. Exclude deferred-tax assets entirely, and that falls to negative $31.9 billion.

Elaine Meinel Supkis

Sigh, yes, Rob, that is probably true. The only way keeping books works is if everyone is ruthlessly honest with themselves. If they lie to themselves like, say, Congress does all the time, the books go way, way off balance. Then a catastrophe strips them of all value and all sanity.

Of course.

Anthony

Anybody following this? The big states start bleeding profusely.

NYgov. just called emergency meeting. (california is going down next)

http://www.nytimes.com/2008/07/30/nyregion/30paterson.html?em&ex=1217563200&en=11b535fdddd976e2&ei=5087%0A

ALBANY — Gov. David A. Paterson, in a brief and rare live televised address, said Tuesday evening that New York is facing a fiscal crisis in the wake of Wall Street’s meltdown, and he called on the Legislature to return next month to grapple with a budget deficit that will grow to $26.2 billion over the next three years.

Mr. Paterson gave few details about what actions he would take, but he told the public that his administration would examine an array of difficult potential steps, including reducing the state’s work force, cutting additional spending in state agencies and selling or leasing public assets.

“Our economic woes are so severe that I wanted to talk to you personally this evening about where we stand,” the governor said in a speech from the Capitol that lasted roughly five minutes. “The fact is, we confront harsh times. Let me be honest, this situation will get worse before it gets better.”


-------

http://www.latimes.com/news/local/la-me-budget21feb21,0,6427050.story

California's budget gap at $16 billion

SACRAMENTO -- California's budget shortfall has swollen to $16 billion from $14.5 billion, according to the state's chief budget analyst, who says the governor's proposal for closing the deficit is so flawed that her office took the rare step of drafting an alternative state spending plan for legislators to consider.

The plan offered by Legislative Analyst Elizabeth G. Hill, whom lawmakers of both parties look to for advice on fiscal matters, calls on lawmakers to raise taxes by at least $2.7 billion. It urges them to reject Gov. Arnold Schwarzenegger's plans for a 10% across-the-board reduction in state spending, suggesting that such an approach is short-sighted.

Anthony

This is nowhere near bottom.

Once state budget goes bust and crime rate soar...those mpty houses will worth NOTHING. it'll be drug and crime dent.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aMrMPu3wiBy8&refer=home

Fed Extends Emergency Loan Programs Through January (Update2)

Bernanke flagged the likelihood of the extension in a July 8 speech, saying the Fed is ``strongly committed'' to financial stability. The programs represent a provision of Fed credit to nonbanks unprecedented since the Great Depression.

The Fed will start auctions of options of as much as $50 billion in the TSLF on top of the $200 billion program, which loans Treasuries to securities firms in exchange for asset-backed securities and other collateral.

New York Fed officials plan to consult with the primary dealers of U.S. government bonds on the TSLF options program, the district bank said in a separate statement. The options plan is aimed at providing liquidity for two weeks or less surrounding key financing periods to be identified. Further details are planned on or before Aug. 8, the New York Fed said.

JZ

From Wikipedia article on the GD, sounds a lot like nowadays, just before the crash

Inequality of wealth and income

Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951)[22]:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.] Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

PLovering

Milton Friedman, famed Noble Economist, said that the 1929 Depression was caused by the US Federal Reserve Bank.

While the US Federal Reserve was funding Hitler with Treasuries worth $Billions to build spanking new autobahns, schools, factories, and armies in the 1930s, Americans were starving.

Americans will starve again in the US Federal Reserve Depression of 2009.

Elaine Meinel Supkis

Bush's granddaddy was the one funding Hitler via a PRIVATE bank.

Not the Fed Reserve. And the Jews were being looted by Hitler who seized their businesses and bank accounts. This is what funded all the goodies.

Anthony, I was going to write about the budget deficits last night but the earthquake intervened. I just posted about it a few minutes ago. Good grief, this is bad news. Barely gets headlines.


JZ, as international trade, commerce and banking collapsed as England and Germany collapsed internally, the loss of this income that was coming into the US to service what was then, epic sized lending for WWI, the entire banking system was decapitalized.

So there was no possibility of lending. The US government was SOLVENT. So Roosevelt struggled to provide emergency funding. He was correct to try doing this.


WWII took care of that by eliminating all trade partner's manufacturing bases as well as export markets [try exporting to South America while sinking each other's boats!].

Bear of Little Brain

PLovering:
"Noble economist". Nice slip. If only…

Elaine Meinel Supkis

The Fed Reserve caused the Great Depression because that bank lent most of the money used by France and England to fight Germany in WWI and the NONE of them paid us back.

PLovering

Paul Warburg, founder of the US Federal Reserve banking system, had the FED fund Hitler with $Billions in US Treasuries.

Warburg and his fellow Cabalists funded Hitler well into the 1930s, only stopping when Germany started printing its own money and financial instruments. Thereafter, the Cabalists funded Stalin exclusively.


PLovering

Bear:

Nice catch. I stand corrected.

Michael

TOO BIG TO BE EVALUATED HONESTLY

Yes, the states, counties, and cities of America are going bankrupt and (especially California) using MORE BORROWING to get through the current crisis. Oh yeah, and so is the U.S. government. Professor Minsky calls this "Ponzi Finance," where you have to use new debt in order to make the payments on your existing debt - until you crash.

And yet...they're all still rated AAA and people are buying their bonds at interest rates under 6% (for 30 year bonds!!). I guess clinging to the fantasy that it's still "business as usual" is more important than making the painful adjustments necessary to survive the coming economic disaster.

Elaine Meinel Supkis

Correct, Michael. The creditors in Asia and Europe pray that the old status quo returns. Except for the Chinese. They pray for us to go bankrupt, badly.

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