"It’s important to keep in mind, too, that the financial sector has had a long history of fluctuating without any correlated fluctuations in the rest of the economy. The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits.
It turns out that John McCain, who was widely mocked for saying that “the fundamentals of our economy are strong,” was actually right. We’re in a financial crisis, not an economic crisis. We’re not entering a second Great Depression.
How do we know? Well, the economy outside the financial sector is healthier than it seems.
Since World War II, the marginal product of capital, after taxes, has averaged 7 percent to 8 percent per year. (In other words, each dollar of capital invested in the economy earns, on average, 7 cents to 8 cents annually.) And what happened during 2007 and the first half of 2008, when the financial markets were already spooked by oil price spikes and housing price crashes? The marginal product was more than 10 percent per year, far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money."
Que Dios te escuche!
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Andrew W. Mellon (http://en.wikipedia.org/wiki/Andrew_Mellon) was Treasury Secr. during the 1920s and advocated liquidation (“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” –although this is disputed by modern historians as never advocated by Mellon, see here: http://divisionoflabour.com/archives/004676.php). Was the Great Depression so bad? You will note that during the 1930s the GDP was actually higher than the 1920s. See: http://www.measuringworth.org (the average GDP (adjusted to yr. 2000 dollars) was actually greater in the 1930s –at $789 billion–versus the 1920s, at $731 billion). And the 1920s had worse output years (1921, at $595b, compared to the 1930s worse year, 1933, at $636b). The difference between the eras was unemployment–the 1920s had low unemployment. Why high unemployment during the Depression? Because as Keynes later wrote, wages are ’sticky’, and due to unionism in the early 20th century workers refused to take a pay cut, as was necessary to reduce unemployment for the nation as a whole. Thus, those who had jobs (unionists) and money (the rich) during the Great Depression, actually gained over those that did not, because deflation made their capital worth even more. Rich got richer.
The downside of today’s flawed ANTI-Mellon strategy is that it prolongs the misery–Japan has tried to bail out its ‘zombie’ (dead, junk filled) banks from at least the late 1990s and failed. Their economy has been in the doldrums for close to 18 years. Is that the road the USA wants to follow? I think the sounder advice is that which purportedly was issued by Andrew Mellon (supra), but in fact never carried out by FDR (hence the long Great Depression). In short: liquidate everything, get government out of the LIBOR market, and make sure unions are not powerful. The Invisible Hand will then sort things out.
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