Why the recession/depression has hit bottom
This is a strange kind of post when politicians are getting shot down for mentioning ‘green shoots’ – in a reference to Norman Lamont and the 90s recession. But you can get all the real information here, this recession will be V shaped, as in very quick and steep down, and possibly up again at the same rate. But the big question and unknown is where the bottom will be.
We may have hit bottom this week. All the banks share prices have doubled this week but why? Remember, bank shares are a symptom not a cause. In fact last week all UK banks other than HSBC were going out of business, why the change? Well, in the far off US of A house prices stablised for the first time in 3 years. This in theory puts a bottom on the losses the banks in the UK will experience, based on the UK economy following USA, and also that we have lots of US debt over here.
Will it stick? Well it might this crash however is cyclic, and to misquote Paul Krugman, is the mother of crashes. We have over priced housing, as in Japan early 90s, bank runs like both the 1930s and the 1910 trust fund crisis, and possibly, though thankfully not yet in the UK, a currency crisis like Asia/Argentina in the 1990s. In fact the Irish are complaining we devalued the £ on purpose,which i am sure we did. Not that we had any choice.
We may have seen the bottom, therefore. In about 4 years we will escape from the crash, I am old enough to have had a father (he was 49 when I was born) who remembered and talked often of the Great Depression. It genuinely influenced his actions until the end of his life (he was mean with money). I hope this is not the world my children will live in.
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To quote Wikipedia’s article:
‘Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.’
So, a lot depends on this G20 summit deal.
Still recessions/depressions are often marked by rapid technological change and introduction of new media.
I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.