I did inhale.

..and check out that Krugman book on Depression economics....I'm getting more curious about how a nation/society can stay afloat in Depression conditions.

I admit, I'm too young to have lived through it the last time, and those I knew either are dead now, or aren't economists, to be able to explain to me what happened...

-5.75,-4.05
"God gives men a brain and a penis, and only enough blood to run one at a time." -- Robin Williams

AFP
Published: Tuesday December 16, 2008

US President George W. Bush said in an interview Tuesday he was forced to sacrifice free market principles to save the economy from "collapse."

"I've abandoned free-market principles to save the free-market system," Bush told CNN television, saying he had made the decision "to make sure the economy doesn't collapse."

Bush's comments reflect an extraordinary departure from his longtime advocacy for an unfettered free market, as his administration has orchestrated unprecedented government intervention in the face of a dire financial crisis.

"I am sorry we're having to do it," Bush said.

But Bush said government action was necessary to ease the effects of the crisis, offering perhaps his most dire assessment yet of the country's economy.

"I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we're in a crisis now. I mean, this is -- we're in a huge recession, but I don't want to make it even worse."

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Paulson and Bernanke are making it clear that they will do everything in their power to keep yields on the long end of the yield curve as low as possible in an effort to shore up the US housing market. Bernanke was out directly talking up the idea of debt monetization. So far, these scary plans to buy money with money straight from the printing presses is being taken in stride and long yields continue to fall precipitously (macro players are also getting flushed out of the formerly popular bets on the yield curve steepening - the 2-10 spread has collapsed from a near record 260+ bps in mid-November to 180 bps at present.) Are we on the way to deflation or hyperinflation or both...? It's tough to say, but the Fed has lost control of credit markets by having to resort to these desperate measures. Lenders in the real market for loans are paying record wide spreads to benchmarks if they can get any credit at all, and consumers are also feeling the pinch on their credit cards, where credit limits are being slashed and interest rates jacked up to ridiculous levels - often 30% or more. So despite effectively zero interest rates, quantitative easing, and now signs of debt monetization, the average lender is experiencing a steadily tightening noose on their credit.
fxstreet.com- 2 Dec 2008

Bernanke talks up debt monetization as printing presses go into even higher gear

Why am I put in mind of the scene from Platoon of the squad leaving the burning village?

Posted on Tue, Dec. 16, 2008
Kevin G. Hall | McClatchy Newspapers

last updated: December 17, 2008 07:40:35 AM

WASHINGTON — By cutting its benchmark lending rate to historic lows Tuesday and promising to combat the U.S. recession head on and aggressively, the Federal Reserve served notice that more unconventional actions probably are ahead as it fights to reverse the nation's economic woes.

The Fed pushed its federal funds rate from an already low 1 percent to a target range of 0 to 0.25 percent. This marks the lowest point ever for this target rate that banks charge each other for overnight loans. The funds rate serves as a benchmark for a wide range of loans in the U.S. economy.

The Fed's rate cut was larger than expected, and highly unusual, for the Fed usually targets a specific rate instead of a range. The move highlighted the Fed's determination to act aggressively along with the reality that the U.S. recession is deepening rapidly.

Evidence of that came from the Commerce Department, which reported that housing starts fell 19 percent in November and 47 percent on a year-over-year basis. New residential construction has fallen to levels not seen in almost half a century.

On top of grim retail sales, mounting job losses and sagging exports, the U.S. economy is struggling on many fronts.

In theory, the Fed's action should reduce the cost of borrowing for consumers and businesses, since the prime rate — what banks charge their best customers — moves in tandem with the federal funds rate.

The prime rate typically influences rates for car loans, student loans, credit cards and other debt. With Tuesday's cut, the prime rate is expected to fall to 3.0 to 3.25 percent from 4 percent.

However, despite the attractive rates, banks aren't lending to most consumers and businesses. Weak financial institutions continue to hoard cash and build their balance sheets, with little appetite for risk in new loans. That's worsening the economic downturn, especially since it hurts consumers, who drive almost two-thirds of U.S. economic activity.

In a statement, the rate-setting Federal Open Market Committee said that "The outlook for economic activity has weakened further . . . the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."

The vow to deploy "all available tools" sparked a rally on Wall Street. The Dow Jones Industrial Average shot up 359.61 points to close at 8924.14, while the S&P 500 finished up 44.61 points to 913.18 and the Nasdaq added 81.55 points to end the day at 1589.89.

A senior Fed official, briefing reporters late Thursday on the condition of anonymity in order to speak freely, said that a rate range was chosen because the real federal funds rate — what banks actually charge — has been well below the Fed's target in recent months.

The Fed's statement said that "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

The Fed has little room left to maneuver on interest-rate policy now and will use other tools.

"They are saying that they have unlimited arrows. As the central bank of the United States, it is the only entity that can write checks on itself without limit, and that's a very powerful weapon the Fed has against the downturn," said Marvin Goodfriend, a former research director at the Federal Reserve Bank of Richmond who's now an economics professor at Carnegie Mellon University in Pittsburgh. "It won't work immediately, but if it is used aggressively, it will work."

Chief among those other tools is to keep lending aggressively; the Fed's balance sheet already has gone from about $800 billion to $2.2 trillion as it pulls out all the stops to confront the worst financial crisis since the Great Depression.

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why bother giving the banks more money?

.I'm getting more curious about how a nation/society can stay afloat in Depression conditions.

Why do you think staying afloat is an option? Sometimes ships sink. Not that there might be a few survivors who cling to some wreckage and make it to dry land.

I am wondering if an expanded barter system might work for people. Ideally you could have it done online, with ratings for participants (eBay style). This might loosen up the 'velocity' of economic activity. After all, its the exchange relations that have become radically disrupted. Why not organize more swapping of chickens/firewood/professional services etc?

(additionally is anyone keeping an eye on the payday loan racket? Which I would call pretty much the opposite of bartering)
--
Hongpong.com

Walker's World: Could U.S. go bankrupt?
By MARTIN WALKER (UPI Editor Emeritus)
Published: December 17, 2008

WASHINGTON, Dec. 17 (UPI) -- Is the Fed running out of firepower? Or, to rephrase the question, is it possible that the central bank of the world's biggest economy is becoming overstretched and overwhelmed by the costs of the crisis?

If so, does that mean the United States could go bankrupt?

The question is becoming urgent, because Tuesday the Fed cut the federal funds rate from an extraordinarily low 1 percent to an unprecedented 0.25 percent, with a prospect of going down to zero.

But even such unheard-of steps might not, on recent experience, revive the animal spirits of entrepreneurs and get bankers lending again. Fear still rules the markets.

Ben Bernanke, the chairman of the Federal Reserve Board, is trying desperately to keep the good ship capitalism afloat and is deploying heroic, innovative and risky measures to do so.

The costs are becoming astronomic. Over the course of the last year the Fed's balance sheet has tripled to $2.2 trillion. Like Atlas of the Greek myths, who bore the world pressed down on his shoulders, the Fed is currently holding up the U.S. financial system.

It has launched new credit facilities, accepted dubious collateral for loans to banks, arranged currency swaps and generally done things it has never done before in its 95-year history. Under the Term Auction Facility, it has issued $448 billion in liquidity to banks against various securities including Treasury bonds, municipal bonds, AAA securities and so on.

Under the Term Securities Lending Facility it has issued $185 billion in Treasury securities to guarantee inter-bank loans, backed by vaguely defined collateral that includes the now-notorious "mortgage-backed securities."

Since Oct. 29, when it decided to intervene to unblock the commercial paper market, on which many U.S. corporations depend for operating funds, it has issued $349 billion in net liquidity. Under the Commercial Paper Funding Facility it has issued $309 billion and a further $41 billion under the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility.

The Fed's balance sheet also shows another $628 billion in assets, much of it in the form of currency swaps, like the special agreement on Oct. 29 to extend $120 billion to Mexico, Singapore, Brazil and South Korea. This followed the $180 billion swap agreement the previous month with the Bank of England and the Japanese, the European, the Canadian and the Swiss central banks.

And all this is being done under a veil of secrecy. Citing banking confidentiality, it has rejected a Freedom of Information act request from Bloomberg Television to detail precisely the kinds of collateral it is now accepting and the credit it is issuing.

It is also allowing banks to turn a neat arbitraging profit on the funds it lends out to commercial banks at an interest rate of 0.49 percent. The banks then deposit these funds back with the Fed as reserves, on which they receive 1 percent interest.

In theory, the Fed's ability to issue credit and supply funds is limitless; they can simply continue to print money or extend guarantees, and they will be backed up by the full faith and credit of the United States.

In practice, there will come a limit when the markets, foreign or domestic, start questioning the value of that credit and demand much higher interest rates to hold dollars that are visibly declining in value. That has not happened yet, and given the need of the rest of the world's central banks for the U.S. economy to remain afloat, it may never do so.

But we are getting into risky and uncharted territory. This expansion of the Fed's balance sheet is but a fraction of the overall exposure. The Fed has said it is prepared to put as much as $2.4 trillion into the commercial paper market (the $349 billion listed above on the balance sheet is the current net position).

And at the end of the day, the Fed also stands behind the $1.55 trillion issued by the Federal Deposit Insurance Corporation, and the $950 billion by the Treasury and the $300 billion by the Federal Housing Administration and the $200 billion that has been pledged to Fannie Mae and Freddie Mac.

Altogether, more than $7 trillion (or about the wealth that the entire U.S. economy produces in six months) has been committed to the financial crisis by the U.S. government and its agencies. And so far, it has probably stopped a banking collapse, but it can hardly be said to have saved the system.

Currently shrinking at an annual rate of more than 4 percent, the economy is sliding down the slope from recession toward depression. Consumers are on strike. The housing market continues to sink, with new housing starts falling another 19 percent in November. And the world is following the United States down this grim slope, with China reporting drops in exports last week. And now this week China reports that its output of electricity, a reliable indicator of economic activity, fell 9.6 percent in November.

The measures currently being taken by the Fed are historic. It never did anything like this during the Great Depression, and the only comparison is with the emergency measures it took to finance World War II.

But we are only in the initial stages of this recession, and already the federal debt is heading toward 80 percent of GDP. Back in 1980, it was just over 30 percent of GDP. The last time it was as high as this was the aftermath of World War II, when the debt peaked at 120 percent of GDP.

Forget about the war on terror; for the Fed, this is now the war to save the economy.

The effective rates at which the banks were borrowing were already near zero. Thus, nothing happened.

-- Storm brings only richness with it