Thursday, October 2, 2008 0 comments ++[ CLICK TO COMMENT ]++

Those Talking Depression Need to Make Their Case Clearer

David Leonhart of NYT presents the case from those arguing why we may be on the verge of another Great Depression, and hence must pull out all stops, which essentially means expending huge sums of taxpayer money (since USA is running a deficit, this means passing on big debt to future generations.)

In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

But for those like me--who, like most liberals, is ok with throwing money at problems--the argument isn't convincing. In fact it doesn't even seem to deal whatsoever with the root cause of possible undercapitalization of banks. I think most people also agree that financial institutions needs to de-lever. It's not clear to me how anyone will be induced to de-leverage themselves when money is thrown at them. One of the reasons the monoline bond insurers have been de-leveraging like crazy (by essentially writing no new business, closing out policies and preserving capital) is because the government is not giving them any money and hence they are forced to do so.

One of my concerns is that many people don't seem to separate the de-leveraging that is inevitable from the unintended one. For instance, it makes perfect sense to me how auto loans (particularly leases for trucks and SUVs) are being severely curtailed. Value of these assets are dropping and some don't want to pay the high gasoline costs anymore. Similarly, the fact that debt financing is tougher now may not mean much. My view is that the debt market was out of control with LBOs and is simply reverting to something "sensible." Private equity shops, not to mention the bankers/lawyers/accountants/et al working on these deals would argue the situation is terrible but it seems inevitable to me.

Those saying this is going to turn into a depression need to make a more persuasive argument.


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