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1929 and 2008: Any economic parallels?
by Ira Hansen
Apr 12, 2008 | 668 views | 0 0 comments | 9 9 recommendations | email to a friend | print
In March of 1929, Charles E. Mitchell, a director of the Federal Reserve Bank of New York, announced the bank would loan as much money as necessary in order to “avoid a general collapse of the securities markets.”

In the same month, Yale University economist Irving Fisher proclaimed “Stock market prices have reached what looks like a permanently high plateau.”

The previous year, while accepting his party’s nomination for president, Herbert Hoover proudly announced, “We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us.”

A few voices in the wilderness urged caution. Economist Roger Babson was widely derided for saying, “Sooner or later a crash is coming and it may be terrific.”

So, Ira, what are you driving at? Another “Great Depression?”

Not exactly. However, there are ominous clouds on the economic horizon we should not ignore. Right now Nevada is in a mild recession caused by excessive levels of easy credit, which allowed a housing boom to occur. Housing construction and pricing reflected a true bubble, a classic example of those periodic spurts of euphoria which always end in a painful “correction.” And the higher the bubble, the greater the fall.

During the time “the Fed” was under the control of Alan Greenspan, a steady, slow expansion of the money supply occurred, creating a super abundance of “easy money” — credit available for all sorts of speculation. Remember all those credit cards for thousands of dollars you received in the mail? Sign the dotted line and, like magic, money to spend was at your fingertips. Home equity loans, “no down” mortgages and generally easy-to-get credit was happily handed out. Money was everywhere. Almost everyone qualified. “Housing starts” and “consumer spending” were carefully watched economic indicators.

Housing is now old news; today the real danger I see is “consumer spending.” Driven by credit purchases, whole industries, giant malls, imports galore, have popped up to meet this demand.

But most of this economic growth has been built on a shaky house of cards. Purchases have been on speculation. Credit card debt, used to basically finance “consumer spending,” is at an all-time high. Credit card debt averages about $10,000 per household nationally; here in Nevada it is closer to $25,000 per household.

Total debt for credit cards is reaching unmanageable levels. Many cannot even make the interest-only payments; paying off the principle is ancient history and the growing pile of “bad loans” expands. The housing bubble’s burst sent shockwaves through the entire economy, and major banks and lenders are being propped up by bizarre and previously unheard of “buyouts” by the Federal Reserve — a clear sign of desperation to prevent panic. What happens if the credit card bubble follows suit?

To stave off the obviously needed correction — a reduction in consumer spending, allowing a reestablishment of some level of equilibrium between income and expenditures — the government is seeking to keep the economy rolling merrily along by sending us a “stimulus package” with a happy face note: “Keep on spending.”

Yes, we will all, on credit, stay wealthy and prosperous.

But the whole house of cards is wobbling. The Fed has, only since December, pumped $310 BILLION into dangerously shaky huge banks and similar institutions facing bankruptcy thanks to uncollectible bad loans. Credit card debt, another bubble that financed the now-receding binge of “consumer spending,” has yet to pop. What then?

I don’t have that answer. It is a little scary to think about. At the very least, thanks to undoubtedly future pumping of money by the Fed, inflation will rise, the dollar will continue to slide and prices will rise. And that seems like a best-case scenario. The much hoped for “economic recovery” seems far off. Time will tell.

Ira Hansen is a lifelong resident of Sparks, owner of Ira Hansen and Sons Plumbing and his radio talk show can be heard Monday through Friday from 3 to 6 p.m. on 99.1 FM.
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