Why don't we just allow the market to work?

Justin, seriously, this is sort of like Mrs. O'leary's cow....

Thanks for the recognition, but my questions are driven by a realization that the traditional media has done nothing to explain what is really going on.

Let's start from the top.

You utilize the example of the Great Depression, but I don't understand how that period is relevant?

Here is a generic description of the Great Depresssion (accord Wikipedia):
"The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday. The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939.

The depression had devastating effects both in the industrialized countries and in those which exported raw materials. International trade declined sharply, as did personal incomes, tax revenues, prices, and profits. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by 40 to 60 percent. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as farming, mining and logging suffered the most."

1) Note that the depression began with a market crash. We have not had a stock-market crash or any real market crash. How did you arrive at this 60% figure and 14% unemployment? What methodology did you employ?

2) The depression primarily affected industrialized countries. We are far less dependent upon energy or manufacturing than ever before. In fact, most economies are evolving into more service oriented and knowledge based. We know that such economies find exceptional efficiency through enhanced productivity and diversification. Is there any evidence that a great depression model would be applicable to current economies?

3) The way that I see it the underlying problem with the market is simply one of supply and demand. It seems that addressing secondary lending is just window dressing. Isn't the real problem that we have millions more homes than buyers? Further, there are homes for which we have residents that are marginally able to afford their mortgages, right? Why don't we do something to bring that supply-demand curve back into equilibrium?

4) How does secondary lending affect the other supply - demand curve that is out whack? I am speaking primarily of the fact that we have home prices that have outdistanced incomes which are essentially flat against inflation. It is plain commen sense that when home prices are higher than people can either afford to buy out-right or it makes sense for a bank to be finance that this supply - demand curve must come back into equilibrium as well.

I'm not beating up on you, but I find it shocking that nobody has stated the obvious (Roubini excepted).

More simply:
We have X number of buyers that makes Y number of dollars.
We have A number of homes that cost B amount of dollars.
How do those numbers match up? How does bankrolling the secondary lending market give investors assurance that the market will recover balance? At some point, the bills must be paid, right?

We had our stock market crash in 2001-2002, then dragged the whole thing out with a real estate bubble.

I think all your points that the economy has changed, and isn't as vulnerable as in the 1930s, are valid. But your X (the number of buyers) and Y (their incomes) still aren't constants. They can be affected by what's going on in the rest of the economy. You'd rather have an equilibrium with a high X and high Y than a low X and low Y. I don't think anybody thinks the current actions are going to stop house prices from falling further. But the fear is that if the secondary mortgage market suddenly disappears you get a downward spiral in which falling house prices beget more foreclosures and the slumping housing market begets job losses which beget even more foreclosures which make house prices fall even further. And so on.

And I don't think Nouriel Roubini is philosophically opposed to government bailouts of financial institutions. He just isn't a big fan of how this particular one is structured.

Nice explanation. How about a write up in the dead tree edition? I don't think anybody has provided that vivid of a picture. I don't think we should scare people, but we should know what we are confronting as a nation.

Traditional media today is ill-equipped to analyze; they call a dozen people for quotes, then string them together with a few aging and well-worn homilies. No thinking required. Justin is a dinosaur holdover from a bygone day.

The problem is that many government policies and finance industry machinations have the effect of distorting home prices. Things like the home interest tax deduction and secondary markets have the effect of making more money available to housing, which is consumed by house price increases (nature abhors excess money lying around). Our mistake was a shared delusion that there is some fundamental value to real estate and that that value steadily (or rapidly) increases. Turns out it's just a market, maybe much like the stock market.

I wonder if much of the angst felt by the average person has less to do with the perceived taxpayer bailout, and more with the fact that finance and real estate executives are walking away with multi-million dollar paychecks for screwing up the entire economy so royally? I would have been happy to screw it up for much less.

Curmudgeon,

Your reflections are spot on. My real angst is that we are now rewarding private risk with government guarantee while Angelo and numerous others get rich. It is unacceptable in so many ways.

Further, the public at large is being fed soundbites when they need to read, hear and understand an entire paragragh. Our short attention spans, I fear, are causing us to sign checks that our grandchildren won't have the funds to honor.

Oh well, not our problem....where is the sense of shame, moral outrage and indecency? Too many people just don't get it. I suspect it will take a cataclysmic event to arrest Americans to the danger. We're driving without a seat belt, and we know that they save lives.

Curmudgeon says 'I wonder if much of the angst felt by the average person has less to do with the perceived taxpayer bailout, and more with the fact that finance and real estate executives are walking away with multi-million dollar paychecks for screwing up the entire economy so royally?'

I think that's a large part of the angst. The quote in Justin's post on Fanniefredderung (http://time-blog.com/curious_capitalist/2008/09/monday_morning_franniebacking.html) about Pimco loading up on the GSEs and then essentially getting bailed out by the Fed's move isn't making me feel all warm and fuzzy. Plus even though the management is getting tossed out at Fannie & Freddie, they are still going to come out with millions (IIRC both CEOs had contracts that gave big payouts - Mudd ~$9 mil and Syron up to $14 mil). Its looking like yet another example of being rewarded for screwing up.

Oh well, not our problem....where is the sense of shame, moral outrage and indecency? Too many people just don't get it. I suspect it will take a cataclysmic event to arrest Americans to the danger. We're driving without a seat belt, and we know that they save lives.

Bryan:

I had a post typed up to this effect yesterday but decided against posting it for the following reason:

Even if we had a cataclysmic event I don't think most Americans would recognize the true lesson of the event. They would blame the fed for not stepping in, blame deregulation, or over regulation etc.

People have a habit of trying to catch the rocket that looks like it's moving up the fastest without regard for how far it can fly, what direction it's headed long term, etc. Even with a cataclysmic event I don't think people will ever take the time to do their homework instead of letting greed takeover. This is true with stock markets, housing markets, and government spending, etc.

MBirch,

What you said. I hope against human nature.

Sort of like I feel about McCain/Palin being shallow on issues. But many guys think Palin is hot, and I suspect are voting with what's in their pants and not what is in the pockets of their pants. So, I fear that Palin will be our next VP.

Would it help if Justin used the 1970s as an example of heavy Fed Policy that prevented another depression and gave us a long recession (which in turn brought us the Reaganonmics)?

I think we can only call it "rewarding bad behavior with tax payer money" if the Fed or the government doesn't learn that they need to step up with harsher financial regulation and stop bending at the will of Wall Street.

(How is Bryan from Houston from the state of Texas?)

I'd say, as a string of posts, Curious Capitalist has marked out the need for the Fannie/Freddie takeover nicely. Especially with good equilibria / bad equilibria point in this post. The Great Depression is (despite to wikipedia entry posted above) thought to have been a financial crisis. Not financial only (a lot of real activities crashed as well); but the financial collapse really helped make the Depression spectacular. So financial market vigilance protects the actual / real economy.

Looking at the current situation, simply letting go and giving 'the market' a chance to re-equilibrate itself is a massive gamble. There is an outlook that argues finance is a good influence or bad influence, but never an inert influence. Or, once you develop a financial system you best ensure you have a well functioning one - because there is no middle ground. This gets back to the crisis of deleveraging (posted on CurCap last month). If things must ratchet down in order to reestablish equilibrium, then many someones are going to have to accept less than what they owe. Pile a few of those on families and they're broke- out of college(?), locked out of access to affordable credit for years(?) and etc, etc. Pile enough of those on a bank and it fails - depositors lose some money; small businesses lose a potential source of funds to start or grow. That's new jobs that won't happen.

I know there's a lot of sympathy in the U.S. for letting the market work and all of that. And during crisis that suppport is based on the belief that the 'market' solution is quicker, less painful and deals appropriate punishment to those who caused the mess in the first place. But, I'd argue, those three expectations are misguided - especially when the mess is financial (tidal waves exhibit poor aim). It may well be better to keep the status quo largely propped up until such a time as growth elsewhere in the economy catches up and stable growth can resume.

@Bryan: Whether we like it or not human nature always seems to take over

@Brew: The government seems to learn it's lesson for a few years, then slowly go back to the policies that get it in trouble. It's often hard to the government say no when the last disaster was so long ago, and businesses so persistent in lining your coffers.

@brew

"(How is Bryan from Houston from the state of Texas?)"

Not quite sure what you mean, but if you're wondering about the economy here. It is great. Oil anywhere over $50 - 60 is making us rich. The rest of America....I understand the struggle.

If you're referring to Ike bearing down on us here in Texas, we're used to a little bit of stormy weather.

@tegwar
It's probably good that I'm not in the Fed and treasury. I would have raised rates already to battle inflation and told everybody from the treasury perch that folks had better get ready for the pain. I've been reading Bill Fleckenstein and he has made me a lot of money this year. I truly believe that we cannot avoid the malaise. It can only be delayed.

@Bryan from Houston: Not to stereotype all of Texas, but you don't sound like a diehard Republican. At least not like any Texan (excluding Austin, Texans) that I know. And I know quite a few.