2. There is no art or science today that allows us to accurate give odds. Specific economic predictions are wastepaper.

3. The Daily Reckoning is fun to read, but not too useful. Somewhat like relying on the Sunday comics when we need the Financial Times.

4. We have to keep a sense of proportion about this. We have not had a substantial recession in a quarter-century. That does not mean that a typical post-WWII recession would mean the end of life as we know it. The post-WWII average is a recession every 5 years (20% of quarters). People just buckled down, like ships in a storm. Even a severe recession would be bad, but survivable — just as we survived 1973-75 and 1980-82.

4. What made the Depression was a series of public policy mistakes. They had not read Keynes, who published his great work in 1936. I doubt we are in much worse shape than 1929. Our economic command and control machinery is far superior to that of 1929. We will imo be OK if we hang together and our leaders do nothing too stupid.

From a great site called the Daily Reckoning:

“The costs of the credit crunch are mounting up. Each estimate is bigger than the one than before it. The latest estimate from the Union Bank of Switzerland is $600 billion. Economist Nouriel Roubini goes even higher - at $1 trillion. Of course, those are just the direct losses…the disappearing cash. There are also losses in implied wealth (and subsequent changes in spending and retirement plans) from falling house prices themselves. The residential housing market is worth some $20 trillion. If it goes down 30% from top to bottom, as expected, that’s a loss of more than $6 trillion.”

And:

The Federal Reserve’s Rescue Has Failed,” announces a headline in the English paper, the Telegraph. Ambrose Evans-Pritchard, the paper’s business editor, says, “The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

“Yields on two-year U.S. Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter. The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.”

One thing that is very different now and 1929 was that the US was physically in a good position. Large, trained workforce, plenty of new (albeit idle) plant, oil and many other resources. When the financial taps were turned on in WW2 the economy bounced back as all the spare capacity was taken up. None of those things apply now, so a recovery will be a very long and painful process, if possible at all. The contrast to now is like comparing a strong, fit youth to a fat, wheezing geriatric on drugs with a walking frame and an oxygen bottle.

The increase over the last decade in the amount of cash, as a percent of total assets, for the companies in the Standard & Poor’s 500-stock index has been steep. One study shows that the average cash ratio doubled from 1998 to 2004 and the median ratio more than tripled, while debt levels fell. According to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998.

The Times cites potential problems with complex risk management financial instruments (aka “derivatives”) as one factor in this cash hoarding:

In the last 25 years there has been an explosion in financial products intended to help companies manage risk — from currency devaluations to commodity shortages. “We would expect improvements in financial technology to reduce cash holdings,” the researchers noted. And yet, corporations have continued to cope with risk the old-fashioned way: by saving for a rainy day. That suggests that either corporations are not making sufficient use of risk-management tools, or that the tools themselves — while helpful — are inadequate to cope with the increased levels of risk that companies now confront, Professor Stulz said.

Theses risk management tools are related to those which have failed in the mortgage context and to those which I have suggested the terrorists are attempting to sabotage.
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Fabius Maximus replies: These kinds of failures are commonplace in financial history, esp. following periods of rapid innovation. Look at the late 1800’s, following evolution of the modern corporation. No need to assume sabatoge. Note that the Times description of corp cash holdings is misleading (simple aggregates cannot accurately describe a population). A small fraction of corporations, esp some giants, have little or no debt and piles of cash. The majority of corps have considerable debt; a large fraction have so much debt that a severe recession (e.g., like 1973-75 or 1980-82) might destroy them. The average bond rating in the US is low investment grade — not “AAA” as one might expect after reading this article.

You might be interested in the Commedia del arte. The Commedia, which began during the Italian Renaissance, essentially featured who variously prevail at the expense of their masters. ( The opera, the Marriage of Figaro, derives from the Commedia. Napoleon stated that, in order to understand the French Revolution, you should study the Marriage of Figaro. ) Rather than relying upon fixed plots, Commedia performances were improvised. This improvisation can serve as a metaphor for 4th Generation warfare.

I’m sure we all want a soft landing from the current situation. We could do worse than the Commedia’s happy endings.

“For much of this decade, financial engineering was to the US what automotive engineering was to Germany. Mortgage-backed securities were the United States leading export — by a large margin. Those securities no longer command a premium in the global market. Indeed, they can only find buyers if they carry an Agency guarantee.

“That has consequences.

“1. The collapse in demand for complex securities has reduced overall foreign demand for US financial assets. There was a time when serious observers - including observers at places like the IMF — argued that the United States comparative advantage at creating complex financial “products” would assure demand for US dollars and the financing of the US current account. That forecast hasn’t been born out. Foreign demand for US equities has emerged, but that demand hinges on getting those assets at a sale price.

“”… Just as the market for housing finance has been “effectively nationalized,” so too has the financing of the US current account deficit. The Agencies are now big buyers of US mortgages. Central banks are big buyers of Agency securities. Treasuries too.”

Tyler Durden: “…We cook your meals, we haul your trash, we connect your calls, we drive your ambulances. We guard you while you sleep. Do not f**k with us…”