The mistake far too many people are making is looking at the Great Depression and comparing it exactly to today's world.
Yeah, the banks failed back in the 30s and that was a huge part of the problem. Yeah, no FDIC insurance back in the 30s, so people lost their
We're experiencing some similarities today, but not only are they on a different scale, but there are issues today that didn't exist 85 years
Here's the breakdown. Credit markets are frozen. Banks aren't lending to each other, and if they are it's at extremely high rates.
Banks are very quickly beginning to stop loans to commercial entities. Short term loans, the type of "credit" today's business model relies on.
Do you think Target pays with a wad of cash when their stores get a shipment of Halloween goods? Do you think your local grocery hands over a stack
of $100s when their bread shipment comes in?
These purchases are made on CREDIT. They get an invoice, and they pay it back in a week or a month or three months. Nearly every business operates
in this manner. My restaurant does. Your local JC Penney's does. The corner gas station does. A short term line of credit is extended from vendor
to buyer, the buyer has a short term line of credit from the bank to pay the vendor, the buyer pays the bank back when its inventory has sold.
THOSE LINES OF CREDIT ARE DISAPPEARING FAST.
Everything the government is doing is to "open up" the credit markets. We've all heard that on the news. The bailout is to open up the credit
markets. The rate cut is to open up the credit markets. The injection of hundreds of billions of dollars is to open up the credit markets.
They're not opening up! The LIBOR has shot up to the highest point of the year, the TED spread has shot up to an all time record. It's not
working. The banks do not trust each other because no one knows how much exposure banks have to not just toxic debt, but to the
Credit Default Swap market
. Dumping over a trillion dollars into toxic debt is NOT
going to restore trust. It will not work that way.
Until the exposure to the CDS market is sorted out, we're stuck. Banks will fall. Until the banks fall, we will have NO WAY TO KNOW how much crap
they have under their belts. Until we go through this domino cascade of banks falling and CDS contracts coming due, we're STUCK.
Why do you think the gov't wants to make loans to private companies
? It's because
the banks won't do it! And that puts us into a damned if you do, damned if you don't situation. If the gov't doesn't make those loans available,
you are going to see food shortages, gas shortages, clothing shortages, shortages of everything sold retail. Restaurants will close. Big retailers
will go bankrupt. If the gov't does make the loans, we'll see the big stores stay open - but as people continue to reign in their spending, less
will be sold. And people ARE reigning in, and they WILL CONTINUE to do so because banks are still pulling back on the credit market. Credit cards
are becoming more difficult to get, limits are being lowered, and it's going to get worse. People will have to live within their means for once, and
that means less spending.
The less spending, the more layoffs. The more layoffs, the less spending. It will continue down that path until the economy rights itself again.
We are headed into new territory here, and comparing the current situation to the Great Depression is short sighted and the complete opposite of