How to Turn a Recession into a Depression

From The Marston Chronicles

Many of you have gotten a notice from one of your credit card companies that they are cranking your rates on all new purchases up into the stratosphere. You had a rate of under ten percent and now it is pushing eighteen percent. Capital One just did this in their bid to make things worse. Of course, if your credit card company was also heavy into real estate loans, they have already cranked most of their rates up to around twenty-four percent. If that company was in really big trouble like Washington Mutual was, they made that rate for not only new purchases but outstanding balances as well.

Economic cycles are just what the name implies: the economy can be in an upward cycle or in a downward cycle. Up to a point, each of these cycles are self sustaining. When things are spiraling upwards, everyone jumps on the bandwagon, increasing demand and prices. But eventually, the "too good to be true" syndrome sets in and you start to hear scare stories about unsustainable bubbles. Usually government steps in and promptly makes things worse as it is wont to do. A downward cycle is driven by fear so everyone pulls in their horns and also promptly make things even worse.

A prime example of this is the reaction of the credit card companies as outlined above. Then Chase Bank bought out Washington Mutual so one would expect them to lower the rates down to something reasonable. Guess again friends. Chase has to pay for buying out the ailing Washington Mutual so they cranked the rates to around thirty-three percent. Jesse James had a gun so what is their excuse? What happens when credit card rates are cranked drastically upward like this? People stop making new purchases because they are now paying much more in interest. Fewer purchases means less economic activity, more unemployment and no job creation. It drives the economy into a further tailspin. Way to go, credit card companies. You just did your part to turn this recession into a full blown depression.

So how did we ever get into this mess? Actually it was very simple. Certain folks in Congress demanded that banks make shaky loans on homes to people who simply could not afford the payments. The Federal Reserve lowered the rates to historic lows setting off a housing bubble. That same board then cranks the interest rates back up faster than the economy could absorb it and causes a housing crash. The two things together put the squeeze on the banks. Then the idiots in Congress adopted the mark to market accounting rule which in the face of a housing crash caused perfectly sound banks to appear unsound on paper and setting off a selling wave of mortgage paper.

The banks reacted by simply refusing to loan money to just about everyone for just about any purpose. The sudden drastic curtailing of credit caused the economy to come unglued since no one could get credit to buy anything. Then they added insult to injury by cranking credit card rates plugging the last remaining source of credit. So what did the federal government do about this mess? They loaned a trillion dollars to those same banks who covered their loses with it and still won't loan a dime to anyone. Talk about money down the toilet. Did they ever repeal the mark to market accounting rule which would have made loaning the banks a trillion dollars unecessary? Of course not. These are the same folks who caused the mess in the first place.

So there you have it, my friends. A short history on how to turn a recession into a depression in a few easy steps. Can this still be turned around? That is highly doubtful. The absolute first step is to repeal the mark to market accounting rule. Seen any push for that outside of the financial community? Not happening. The feds will continue to pour another trillion dollars down the rat hole which will do nothing to stem the tide. Batten down your hatches, folks, because it is about to get a whole lot worse.

Comments :

RightKlik said...

I'm not a big fan of Capital One.