2009 March 23 Monday
Ron Paul Predicts 15 Year Depression

US Congressional Representative and libertarian Ron Paul (R-TX) tells the Financial Times that we are headed into a long depression.

Unfortunately, cashing out will not protect the value of investments, he insists, because “fiat” currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. “The current stimulus measures are making things a lot worse,” says Mr Paul.

“The US government just won’t allow the correction the economy needs.” He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. “No one remembers that one. They’ll remember this one, because it will last 15 years.”

At some stage – Mr Paul estimates it will be between one and four years – the dollar will implode. “The dollar as a reserve standard is done,” he says. He sees little hope for other currencies where central banks have also created too much liquidity dating right back to the early 1970s.

Also, at the gambling911.com web site after arguing for legalized gambling Paul says we are already in a depression and government is extending it by delaying a needed massive liquidation of bad debt.

CONGRESSMAN PAUL: For some people, we're in a deep depression. I imagine if you live in Detroit, you wouldn't have to argue about when the depression is going to start. Government statistics on unemployment are always more optimistic then they really are; I think today they came out and unemployment is over 10% and that's getting pretty serious. But others in the private sector who count all the people who have quit looking for work - it's probably 17 or 18%. That's huge and the sentiment is so negative and the amount of welfare has been wiped of the books has been into the many many trillions of dollars so I would say that we are in a very very depressed condition - much worse than any recession we've had in a long time. I think we have a long way to go because the proper policies have not been solid. We're doing everything to prop up the bad system rather than allowing the debt to be liquidated and prices to fall. For instance, there are too many houses around; there are 19 million houses unoccupied and still the prices are too high and they're working hard to try to keep these prices up. But you want these prices to go down and people who have money to buy these houses so we can go back to building houses again. However, if the government keep interfering with this liquidation of all of the mistakes made then it just takes that much longer. So I think the economy is going to continue and eventually most people recognize this as a depression.

Paul argues the US needs something like the short deep downturn of 1921. Curiously, that downturn was longer and deeper for Britain whereas Britain had a much shallower downturn in the 1930s than the US did.

You can see lots of manifestations of this political resistance to market corrections. Financial and industrial companies are kept out of bankruptcy with government-provided money. Also, the big injections of federal money to increase mortgage availability and to prop up overpriced housing delays the recovery of the housing market. Obama and others on the Left will argue for affordable housing while trying to prevent prices from dropping.

I do not expect a 15 year downturn due to this financial crisis. But other problems such as the retirement of the baby boomers, the huge unfunded liabilities for old age benefits, Peak Oil, and the lower academic achievement of our growing NAM (Non-Asian Minority) population all argue for lower rates of economic growth and even economic contraction.

Update: Rolfe Winkler argues that Summers and Geithner would prescribe austerity for less developed countries faced with so much debt.

The great Ponzi scheme that is the Western World’s economy has grown so big there’s simply no “fixing” it. Flushing more debt through the system would be like giving Madoff a few billion to tide him over. Or like adding another floor to the Tower of Babel. To what end? The collapse is already here. The question is: How much do we want it to hurt?

Using the public’s purse to finance “confidence” in a system that is already kaput may delay the Day of Reckoning, sure, but at the cost of multiplying our losses. Perhaps fantastically.

Bottom line….We can bankrupt ourselves propping up a system that is collapsing anyway, or we can dig ourselves out of debt, if not with higher interest rates then certainly with fiscal austerity. That would be a hard sell to the American people, I know. But deep down, Summers and Geithner know it is the right thing to do. It is, after all, the prescription they wrote for emerging markets facing financial crises.

The propping up definitely transfers money between groups within our society. Renters and full home owners pay mortgage holders. The prudent pay the profligate. The American taxpayers pay the holders of bank debt and credit default swaps. I fear that reducing the cost of bad decisions by financial firms will cause far larger costs for us in the future.

Share |      By Randall Parker at 2009 March 23 09:47 PM  Economics Business Cycle


Comments
Axelrahm said at March 24, 2009 6:55 AM:

Barack Obama is giving birth to the American Idiocracy. Dumb, Dumber, Dumberer, and Dumbererer. The fun never stops with Obama at the helm.

Dragon Horse said at March 24, 2009 8:41 AM:

Bad debt is not really what causes such a sharp downturn, it was the fact everything was magnified by the "shadow market" of derivatives which was unregulated although the Fed had the power to do so...Greenspan said the market will regulate itself through correction. :-O It was also not just the "liberals or dems" who refused to put the same regs on mortgage lending on non-bank financial institutions there were Republicans in the House and Senate that squashed further regulation although they could have passed it, likely because Bush would have vetoed it anyway.

I would really recommend buying or finding this article on line:

http://www.foreignaffairs.com/articles/64823/richard-katz/the-japan-fallacy

kurt9 said at March 24, 2009 10:04 AM:

The government, by definition, cannot solve the problem because it, in fact, created the problem in the first place. It was the existence of the GSE's of GSEs of Freddie and Fannie and their promotion of sub-prime lending that created the moral hazard in the first place. The fact that freddie and fannie being GSE's rather than true private entities, subject to the same forces of competition and regulation as any other private business, tells you that these things should never have existed in the first place. It was the government involvement in the real estate market in the form of FHA, Freddie, and Fannie that created the marketplace distortions and huge debts that has resulted in this mess we are experiencing now.

It is certainly true that Wall Street, true to its greed rent-seeking self, that exacerbated the leveraging with their derivatives. However, this never would have happened if it were not for the existence of the GSE's. The fact that Freddie and Fannie are not being liquidated is indicative that not only is the government not fixing the root cause of the problem, but making things worse in the long run.

The problem is the result of moral hazard that was created by the GSE's. Anyone who does not recognize this is in denial.

Dragon Horse said at March 24, 2009 12:39 PM:

kurt:

According to calculations i have seen...the GSE issue alone would have caused a slowdown, the derivatives caused a recession (globally). If the derivative markets had been monitored properly (as the law calls for but the Fed did not enforce and Dems and Rep over the last 15 years refused to enforce) we would not have the current situation. So it is an issue of degree. Not saying the GSEs are/were good, obviously not, but the fact there were no market controls to prevent a fallout is telling. The fact the media never speaking about derivatives is also telling. I wonder why that is? Keep your eye on the ball.

It is like the difference between shooting yourself in the foot only or picking up the gun and continue to play with it until you shoot yourself in the head. Anyone who does not recognize "degree" is probably not in denial but just not bright or knowing wants to push an ideological agenda. I'm more worried about my IRA and 401K.

Dragon Horse said at March 24, 2009 12:54 PM:

People I blame are Greenspan, Rubin, Bill Clinton, George W Bush, Hastert, Delay...they were all complicate...both parties, dozens of high power pols...

"The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act . But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law."

http://www.nytimes.com/2008/10/24/business/economy/24panel.html?hp

There is no law or rule that forced banks to try to push loans on people who obviously could not afford them or had stable income. The banks have a job to manage risk and they got greedy, no one in government forced it but the government encouraged and turned a blind eye to it. Even when it got out of control and some people started to call alarms almost a decade ago no one did a thing. Greenspan refused, saying the market would 'self correct'. Well it is.

This meme that liberals tried to empower the poor "darkies" and it resulted in destroyed the economy all by itself, is just a myth to push racialist agendas...as usually the truth is more complex but the reality is most people aren't interested in the truth. They look for evidence to justify their belief system, not look for evidence to form a belief. (sigh). Intellectual laziness at its best.

85 said at March 24, 2009 1:01 PM:

"People I blame are Greenspan, Rubin, Bill Clinton, George W Bush, Hastert, Delay...they were all complicate...both parties, dozens of high power pols..."

Dodd, Frank, Obama, NAMs and their enablers...

kurt9 said at March 24, 2009 4:04 PM:

Dragon Horse,

It is certainly true that the SEC has been on holiday for the past 15 years with regards to enforcement of securities regulations.

Randall Parker said at March 24, 2009 6:35 PM:

Dragon Horse, 85,

Yes, Greenspan, Rubin, Clinton, George W. Bush, Barney Frank, Chris Dodd, and a long list of others in both parties are to blame. Whoever voted for the Community Reinvestment Act are to blame. Whoever allowed the investment banks (in some SEC ruling) to use much higher leverage is to blame. Whoever demanded banks loan more money to minorities is to blame. Whoever protected Fannie and Freddie (including Maxine Waters) is to blame.

Also, pretty much most of the governors of the Fed are to blame. Plus, bank CEOs are to blame.

Our elites are either incompetent or corrupt. Take your pick.

Some wordy bastard said at March 24, 2009 7:51 PM:

Dragon Horse, who if I am not mistaken, sucks on the government tit, tells us to look at:

http://www.foreignaffairs.com/articles/64823/richard-katz/the-japan-fallacy

who tells us:

"In Japan, the primary problem was pervasive dysfunction in the economy" and goes on to imply that there is no pervasive dysfunction in the US economy, only in the financial system.

In my opinion, the US economy is laden with pervasive dysfunction, and BHO is only making it worse. The non-productive sector, like Dragon Horse, is only getting larger, and the productive sector is laden down with worthless programs like affirmative action and equal opportunity (although, eventually, someone will realise that a tanking economy can no longer afford such luxuries).

anon said at March 25, 2009 12:53 AM:

"This meme that liberals tried to empower the poor "darkies" and it resulted in destroyed the economy all by itself, is just a myth . . . "

Undoubtedly, the argument that such efforts destroyed the the economy all by itself is a myth, as is the argument that such efforts were not a significant contributory factor. Lots of factors came into play more or less simultaneously, or in a kind of cascading effect. The Clinton adminstration upped the stakes on the CRA, and used its regulatory powers to "force" or "encourage" banks to extend mortgages to high risk borrowrs.

"Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac."

Source:

http://www.ibdeditorials.com/IBDArticles.aspx?id=312766781716725

Said E. Dawlabani said at March 25, 2009 8:44 AM:

I can't believe the level of naiveté of this discussion. If the entire sub-prime market implodes it's estimated to have a net effect of about $1.4 Trillion give or take a few billion. The shortcomings of the CRA, the failures of the GSE's and loose lending practices are all a drop in the bucket compared to the real source of damage... IT'S WALL STREET STUPID!!! They're the ones who are responsible for created the biggest scam ever perpetrated on humanity. Why don't some of you Google financial derivatives and realize it's the cronies with $10 million bonuses who corrupted every aspect of Main street and created a $685 Trillion shadowy banking system based on bets that included giving Joe Borrower money and making bets on his very failure.

I wonder if any of you ever had real jobs in real estate before Lehman and their Wall street Capos took it over. I used the CRA when no other lending programs were giving a penny in housing rehab money for the poor and was able to house over 30 families for many years. I've also done multi-million dollar sub-divisions, but nothing matched the satisfaction I got from helping people get on the right track to pursue their American Dream. Wall Street couldn't leave well enough alone, and had to securitize the heck out of everything we stood for and let all go to hell in hay basket. The last decade has been nothing but FALSE GROWTH and the current financial models MUST DIE for the US to be reborn as a world economic leader again. So please stop blaming the little guy. He was happy living in a rental his whole life and focus instead on Lehman, AIG, Paulson,and the Congress who exempted financial derivatives from regulation. They're the ones who should be behind bars.

Section 8 said at March 25, 2009 8:55 AM:

"I used the CRA when no other lending programs were giving a penny in housing rehab money for the poor and was able to house over 30 families for many years."

Thanks for fucking up my neighborhood.

Said E. Dawlabani said at March 25, 2009 11:47 AM:

Section 8;

Which part of "poor community" didn't you understand! If anything I brought value to the community. If I were you, I will seek immediate psychological help for your displaced anger.

The Idiot Said said at March 25, 2009 12:42 PM:

The level of denial exhibited by the fools apologizing for government demolition of the economy is staggering. It is time to clean the government of these fools and begin again. They will be the death of us all.

Section 8 said at March 25, 2009 12:46 PM:

---Which part of "poor community" didn't you understand! If anything I brought value to the community. If I were you, I will seek immediate psychological help for your displaced anger.---

You really need to edit your comments before you post them. Now go add some more value to communities before the money runs out...

Said E. Dawlabani said at March 25, 2009 9:56 PM:

Angry illiterates have ruined yet another forum for debate.


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