Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Fed Actions Will Delay Real Economic Recovery From Recession

Economics / Recession 2008 - 2010 May 13, 2009 - 06:09 AM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis ArticleClaus Vogt writes: More than six years ago, Fed Chairman Ben Bernanke — then still Fed Governor — gave a laudation for Milton Friedman, one of America’s leading economists.


Friedman’s view on the Great Depression holds that the stock market bubble of the Roaring 20s was not the reason for the Depression. Instead, it was the wrong fiscal and monetary policy in the years after the bubble had burst that caused the Depression.

Bernanke publicly said to Milton Friedman:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Bernanke assured Dr. Friedman that policy makers had learned their lessons from the Great Depression. Unfortunately his statement seems too optimistic.
Bernanke assured Dr. Friedman that policy makers had learned their lessons from the Great Depression. Unfortunately his statement seems too optimistic.

I don’t agree with Friedman’s theory. I’m sticking with Ludwig von Mises and Murray Rothbard who blame the stock market bubble for the consequences of the Great Depression. What’s more, they blame the Fed for allowing bubbles to grow in the first place.

According to this school of thought, the Fed was in the process of doing the same thing again just when Bernanke made his promise to Friedman …

The easy monetary policy from 2001 to 2005 induced the biggest real estate bubble of all time to develop. As forecast by Mises and Rothbard’s theory of the business cycle, it was the bursting of the housing bubble that has done all the economic and financial damage you’ve witnessed during the past 18 months.

The Bigger the Burst Bubble … The More Devastating the Recession to Follow

If a theory or model is wrong, predictions will not come to pass. Garbage in, garbage out. That’s why Bernanke and his Fed buddies did not see this recession coming and kept underestimating its depth long after it had begun.

Remember Bernanke’s estimate of bank loan losses in 2007? He reckoned it would be “up to $100 billion.”

Now these same experts see “green shoots” everywhere! They want to assure you that the crisis has passed, that banks have become miraculously healthy again and that green pastures are just around the corner.

In my opinion, this upbeat scenario is very unlikely. I wish it were true. But theory and history argue strongly otherwise …

You see, the problems stemming from the housing bubble are not resolved yet. Following on the heels of the subprime debacle, a huge wave of Alt-A and option-ARM resets are in the pipeline. They will soon start showing up as huge credit losses.

So the next real-world stress test for the financial sector is in the offing. A glance at this credit pipeline makes clear that it will last until the end of 2012. And reality isn’t as forgiving to banks as the Fed and the Treasury are.

Financial History’s Message: It’s Not Over Yet

On January 3, 2009, Kenneth Rogoff from Harvard University and Carmen Reinhart from the University of Maryland published a study called The Aftermath of Financial Crises. The authors analyzed recessions caused by financial crises, and here’s what they found:

  1. Real estate lost 35 percent on average, and the bear market lasted approximately six years. Stocks tumbled an average 55 percent, and the bear market lasted three years. Unemployment was on the rise for four years and peaked seven percentage points above the cycle’s low (3.4 percent in the U.S.). GDP contracted by more than nine percent.
  2. Government debt rose strongly, on average by 86 percent.

These empirical findings make it clear that the likelihood of a real turnaround is rather dim. And that there is more downside to come!

Wrong Policies Will Delay Any Real Recovery …

Bernanke assured Dr. Friedman that policy makers had learned their lessons from the Great Depression. Unfortunately his statement seems too optimistic.

As a German citizen I have always admired the deep cultural rooting of the idea of freedom in the U.S. Among all classes of U.S. society the importance of freedom, economically and otherwise, seems to be fully understood. Unfortunately, the current financial crisis is undermining freedom on various fronts.

Case in point: The proposed handling of Chrysler’s debt …

Whenever you lend money you expect to get it back. But you know that sometimes borrowers default. This event rarely means a total loss, since a bankrupt company usually has some assets. Laws and credit contracts make clear who gets what and whose contracts come first.

These rules are paramount to the functioning of the capital markets. Without them, lending as we know it would probably not exist. But now, in the case of the Chrysler bankruptcy, these rules are being questioned by government officials.

Instead of sticking to the contracts, politicians are trying to change the rules of lending during the game. If they get their way, this will be a huge blow to the financial markets — not just in the U.S. but in Europe as well.

Politicians are changing the rules of capitalism. A perfect example is the deal they’re concocting for Chrysler.
Politicians are changing the rules of capitalism. A perfect example is the deal they’re concocting for Chrysler.

After all, when the U.S. doesn’t stick to the rules of capitalism, how could European policy makers be expected to have the guts to do so?

So this development in the U.S. is very sad and frightening for the rather small minority of European capitalists.

And it is very frightening for the future of the capital markets, too. All the efforts to get the broken lending machine running again will be dealt a huge blow. This is not a minor development. It targets the core of the financial markets. Indeed, it has the potential do a lot of long-term harm to lending, the financial markets, and the economy.

There are many unresolved problems we have to deal with. This recession is not over yet. If politicians set the wrong course for the economy in this very fragile environment, I see a real danger of a repeat of the Great Depression.

The situation is bad. And more government policy can make it much worse, which is what happened in the 1930s.

Let’s hope they won’t do it all over again!

You can see why I continue to suggest using the current bear market rally to sell stocks and mutual funds. Think of it this way … if somebody had offered you a 40 percent premium on your stock holdings 10 short weeks ago, you would have probably taken it, right? So why not take it now? Have things really changed all that much? I don’t think so.

Best wishes,

Claus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Martyn Strong
13 May 09, 16:13
capital market regulation

Capital markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable.

By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day?

So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days.

The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one's investments every 7 days (based on the specs you give the agent).

A system like this will make the financial markets work as smoothly as the local fruit market.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules