The Great Depression 2.0?
Update: Asia opens down.
By Dan McDermott
Warren County Report Newspaper
The large red headline on Matt Drudge’s Drudge Report said it all: “WOW!!”
The Dow Jones Industrial Average had risen 936 points.
But while Wall Street has an orgasm following yesterday’s record comeback, I thought I would pause to take a look at history.
As I mentioned in a previous post, if you look at the historical trend, the Dow Jones Industrial Average had a pretty steady rate of growth following World War II until about 1984. Then it got pretty crazy, or “irrationally exuberant ,” as former Federal Reserve Chairman Alan Greenspan put it.
If you follow the line above from 1950 to 1984, the Dow should be at most around 3,000 today.
So what happened?
There were many factors which far more learned scholars than I could better explain. But I think a combination of loose regulations, a want-it-now mentality, and the Internet were a large part of the rise.
Loose regulations allowed lenders to loan people homes they could not afford.
I remember talking a couple of years ago to a mortgage broker on my radio show who was advocating stated-income and interest-only loans.
I asked her what would happen if the value of a home went down and an interest-only loan recipient had to sell? She scoffed at the notion. Housing had been going up forever! Was I crazy?
And a stated-income loan which provides hundreds of thousands of dollars to someone with shaky credit on a signature is a liar’s dream come true.
Unfortunately, as the introductory teaser rates made way for balloons or sharp increases, that dream often turned into a nightmare for the homeowner–but not for the mortgage broker who was long gone with her commission.
Part of the blame goes to people who barely earn enough to rent but allowed themselves to become intoxicated about the thought of owning a home and either didn’t read the fine print on the contracts or fooled themselves into thinking they could handle it later on.
Just hand me the keys. I want it now!
But more of the blame goes to the government officials and financial executives who allowed it or encouraged it to happen.
I also think the Internet is a major cause of the huge increase in the stock market.
The Internet is the biggest invention humans have ever created. It has virtually eliminated all borders among countries who choose to participate.
One of the biggest effects is the creation of thousands of technical and other well-paying jobs in India, China and other countries. This led to increased revenue and a higher standard of living in these previously impoverished developing nations.
They are even collecting our debt.
So now, as another guest on my radio show noted in 2006, China and India use more energy than the entire world did ten years earlier.
And a lot of the money generated was made available to Wall Street and in turn to fund these creative mortgages.
As money became plentiful and easy, the prices of homes rose to levels that were absurd and unsustainable.
It was a big Ponzi scheme that has now begun to unravel.
We may or may not technically be in a recession, usually defined as two quarters of negative growth.
But we are most definitely in a housing and a disposable income depression.
No one is buying a home. No one is eating out or going to the movies.
Drive around town and notice all the banners, signs and other sign-ordinances-be-damned methods being tried by desperate businesses large and small to try an attract someone–anyone with a spare dollar to spend in a store or restaurant.
And if you wander into a bar, the drink you buy may be served to you by the person who listed your house a few years ago.
These conditions didn’t change yesterday with the rebound on Wall Street.
And the Main Street businesses and their struggling employees and broke former customers surely noticed when the government didn’t get around to acting until the Wall Street tycoons started to feel the same pain much of the rest of America has been feeling for more than a year.
So what is next?
Look at the chart.
And get ready to weather this storm for a long time.