Jack Cafferty has called our current crisis an "economic perfect storm". The current recession isn't just an American problem, it's effecting global markets and even the unstoppable Chinese economy is feeling the pinch.
There have been many economic recessions in our history and many theories as to their cause.
The Asian Financial Crisis which started in 1997 began in Thailand and was at least in part driven by a real estate crash. This collapse spread rapidly across Asia to Brazil and Argentina. Efforst by OPEC to "pitch in" are atributed to the Russian Financial Crisis in 1998. As the Russian economy began to fail it hit the US by way of the collapse of Long-Term Capital Management, but a quick injection of 3.6 billion Alan Greenspan and the Fed halted the problem in American markets.
The current crisis is very different, it is moving slowly, but for many action from the Fed has come to slowly and in inappropriate ways. But they are not completely unrelated, in fact part of the current sea of troubles can be directly related to this contagion's aftermath.
After the collapse, Most of East Asia, Russia, Brazil and India began devaluing there currency creating current account surplus allowing them to build large foreign currency reserves. Much of this in the way of funding of US treasury bonds. In our current crisis as the US dollar falls in value against the Euro and the Yen, these investments continue and as funding for US banks gets tighter, and people rush to withdrawal there funds American banks are now turning to foreign investors to get the liquidity they need to stay afloat.
As Bud goes global we are already seeing Global companies come in to gobble up American companies at pennies on the dollar.
According to standing theory held by Ben Bernanke and other
Monetarists the Great Depression was caused by monetary contraction caused by poor policymaking by the Federal Reserve and continuing crisis in the banking system. With the failure of large public banks like the Bank of the United States, panic spread and runs on local banks by the public, the Fed's failure to provide emergency funds lead to more and more bank failures. With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch, which was owned and controlled by Wall Street bankers.
This point of view is supported by Greenspan's quick actions and their effects of stabilizing the US securities market in the late 90's
Democrats like FDR blamed the excesses of big business and believed the problem was that business had to much power, this train of thought led to programs like the 'New Deal' which empowered labor and raised taxes on business. Some of the New Deal regulations were declares unconstitutional, the rest were abolished or drastically scaled back in the 70's and 80's.
Even among the worlds great economists there is no consensus on the cause of the Great Depression.
The debate is playing out still in our senate as republicans and democrats square off over tightening regulations and "blank check" funding of Fanny Mae and Freddy Mac.
Bernanke wants tax payers to to underwrite trillions in debt to stabilize these institutions and thus the mortgage backed securities market. Democratic lawmakers who largely control the senate want tighter regulations. But to date both sides have failed to address the reality that millions of Americans are going to lose there homes.
Clearly public bank runs are exacerbating the problem but so is Wall Street. In Bear Markets investors move funds to commodities such as gold, or food, or--you guessed it--oil.
Oil prices dropped today by $9USD a barrel as global consumption fell... but our government has mainly stuck to the story that oil prices are high because of so much demand, even as OPEC nations have continued to say that supply levels are high enough.
According to economists who subscribe to the Austrian School of economics, including guys like Ron Paul believe that the key cause of the Depression was the expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom.
Proponents of this view even predicted the crash. In 1929 Friedsich Hayek stated "the boom will collapse within the next few months."
Ludwig Mises turned down a job with the Kreditanstalt Bank in early 1929 stating "A great crash is coming, and I don't want my name in any way connected with it."
For years men like Ron Paul have been warning this was coming. With America in an extremely expensive war and bail-outs mounting not in billions but trillions and mounting foreclosures, and financial loses on both sides of the mortgage equation compounded by oil prices that have essentially doubled in a short period many are rightly extremely concerned.
Through all of the important financial collapses one principle that cannot be ignored is panic in both markets and savings institutions. Government inaction, or inappropriate action is also common thread, but now as we see with the Indymac takeover, there is little confidence in the actions of the federal government and the Reserve. California is seeing runs on Indymac branches now. Tensions are high and at many locations police had to quell unrest.
Even though the Fed is now holding Indymac and the FDIC has assured customers there funds are safe, many have so little faith in the system and those in charge they are pulling out there savings and compounding the problem even further.
Sideline players are now watching commodities prices closely, as a steady decline in commodities, which are traditionally a hedge bear markets as the last signal to a greater decline. With oil dropping $9 in a single and the ominous tones taken by Bernanke and Paulson today in senate hearings those fears do not seem all together unfounded.
The general sentiment is to hold tight and "keep on trucking" but for more and more the pressures are mounting and foreclosure is looming as 7,000 Americans are receiving default notices every day. Whatever lawmakers plan on doing they need to do it at a faster pace. When this mess is over, many Americans feel they all need to lose their jobs.
The Colombian Military that has been turned into heroes for the rescue of hostages from FARC now stand accused of a breaking international law in a Violation of the Geneva convention.
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