The headlines tell the story as recent days have seen the American economy and its financial system buffeted by seismic failures and the virtual disappearance of major investment banks. The debate raging in Washington these days concerns the form and extent of government intervention that will be required in order to restore stability to the financial markets.
Comparisons to the Great Depression are inevitable, but today's crisis bears little resemblance to the total economic collapse of the late 1920s. Capitalism is not in crisis and the fundamentals of the American economy remain strong. When President Franklin D. Roosevelt took office in 1933, the nation faced a genuine crisis and economic collapse. For the most part, the banks were closed and the nation was out of business.
Nothing like that is happening now, but the financial system is clearly in need of reform and realism. The fundamentals of the economy remain intact. These include American innovation, a dedicated labor force, strong consumer demand, vast natural resources, and unlimited intellectual capital.
More than anything else, this crisis has to do with what happens when the markets come to term with excessive valuations. Put bluntly, wildly inflated valuations led to risky financial adventures and worse. The sub-prime mortgage collapse came as more realistic real estate valuations forced market corrections. The vast global financial system has accepted the inflated valuations as real and traded in the risky mortgages as if the game would go on forever. This was a fool's errand.
There were other causes of the current distress in the markets and other forces at work within the economy at large. The slide of the dollar and the rising price of oil both played a part, as did more fundamental shifts having to do with a globalized economy and the continuing shift toward a knowledge-based economy in a technological age.
Is this all about greed? Yes and no. In the movie "Wall Street," the character Gordon Gekko famously declares that "greed is good." But is the economy really driven by greed?
This question requires a return to what we might call "Economics 101." No one has explained basic economics as well as Adam Smith did in his 1776 classic, The Wealth of Nations. As the great Scottish thinker explained, an economy is based upon the transfer of goods and services from one individual to another. Each partner in the transaction must believe that this transfer is in his or her own best interest or the transfer is not voluntary. Both parties seek to gain something from the transfer. Since no one person can meet all of his or her own needs alone, a vast economic system quickly takes shape. Individuals trade goods and services through the exchange of currency or another agreed-upon form of value.
At every stage, the transfer is made because those involved desire and intend to achieve a gain. The legal entity of a corporation allows individuals to band together in a common economic cause with certain legal protections. A stock market allows individual investors to buy an interest in a company, thus allowing the corporation to use their capital in hopes of future gain. The market works because all concerned hope to gain through the process.
The development of vast global economic systems simply builds upon the simple principle that all participants are willing to trade one good for another they want even more and to invest in the hope of future gain. Continue >>
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mjazz,
The money probably became worthless, or was worthless as it was being printed because there was no gold to back it up. (this occurred during times where gold backed the value of the currency)
That was, therefore a good reason to drop the gold standard, and to base the worth of the currency on GNP...industry, productivity...etc.
I agree with Mohler who seems to understand that in our present system, it is important that we learn to be stewards, as opposed to making a fast dollar(corruption: which is what undermines a currency and an economy that is not based on the gold standard).
Hence, it is important that proper regulations be passed and enforced. Also, any bail outs must give the American tax payer a significant portion in stock of the companies that are being rescued...
Honesty then is the new gold standard in these economies.
Steiner, Germany at one time printed money to pay off it's debt & it became worthless.
Mr. Mohler please remove your head from the sand and see the reality of the situation. It seems that most Americans (including the President) want to pretend that we borrow/print more money (band aid) and put it on the wound (economy) - no more worries!! Whether anyone will admit it or not we are on the verge of a total national collapse and it seems to be politics as usual. Even the Bible speaks of these times. Are we finally seeing judgment? Educate yourself and prepare because the ride could get wild!!!
Yes, yes...literally producing or literally making more money just to pay off the debt is certainly not being completely moral, but on the other hand...
it is necessary and better than allowing our industries and our nation to collapse...
I believe that we are extremely fortunate that our economy is not based on the gold standard. For, it seems to me, that is partially why the 1929 crisis could not be averted...what do you when debt is greater than the gold owned? Hence the crash.
But having a non gold standard puts the emphasis on whether industry, employment, organizational structures, accountability...etc. can continue to remain viable....
What I have trouble understanding is whether in fact we as a nation are making too much of this and in turn scaring investment and the american citizen.
If North Korea and Iran have busily produced American dollars (illegally) why, under the circumstances, cant the government just make more money to pay off the debt? and then simply continue, by reestablishing good and necessary regulation to stop this from occurring again?
Why make so much fuss...?