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8th February 2009.  The Second Great Depression (October 2007 - 2011).

The "Great Depression" was marked by a falling stock exchange from 1929 to 1933.  In those 3-4 years the DJIA (Dow Jones Industrial Average) fell by 90% (from around 400 to around 40).  It took 25 years (about 1905-1929) to get from 40 to 400, and it took around 25 years (1933-1955) to get from the 1933 low of around 40 back up to the 1929 high around 400.

We are right on track to repeat that storyline.

The DJIA is hovering around 8,000, which is just above 50% of the value of 16 months ago.  If this depression followed the pattern established in 1929, then it would halve again in the next 12 months to somewhere around 4000, and halve again to bottom out somewhere around 2,000 by January 2011.  It would then take around 25 years to again reach 15,000.

Economics, like Psychology, is not a science.  In Engineering, one can design a bridge, and know with 99.99% certainty that, barring an earthquake or similar act of God, it will support any load that is applied, so long as that load is within designed specifications.

Historians argue as to whether the course of history follows a predictable pattern, or whether single men can change the course of history.  Alexander the Great is an oft quoted example.  Was he a "great" conqueror utilizing an army provided by his father's enlightened policies, or were his victories due to an historical progression of forces including the moral decay of the Persian empire?

In our modern era, are the Israelis prevailing against the Muslim Umma because they have a more vigorous culture, or is Arab control of oil all that keeps dead issues smelly?  As evidence for the oil money argument, why are imaginary Jewish "atrocities" (eg "bombing of UN school in Gaza") widely published, while even more horrendous Muslim atrocities (e.g. Hamas actions against PLO members after the Hamas takeover of Gaza) rarely if ever make it into the Western dailys?

Or perhaps the answers to some questions in Psychology and Economics are formally undecidable?  Like asking whether a photon is a wave or a particle?  Or Heisenberg?

Consider the causes of the current recession.

The most elegant explanation I have seen for "single person causation" of the current economic was that the seeds were planted around 15 years ago, when president Clinton enacted directives (including repeal of parts of Glass Steagall) that required or allowed financial institutions to give disadvantaged people (e.g. african-americans) access to cheaper credit for housing purchases than then banking fiduciary policy allowed.

That widening of the homeowning population had the predictable effect of creating a greater demand for housing and for housing credit, and a consequent rise in real estate values.  Wall street did it's thing, & found ways to fulfill those credit requirements.  (Those "greedy" financiers would not have existed if the demand for credit had not been so high due to legislative action.)

Those mortgages would not have been unsafe if legislation had not forced banks to give uncreditworthy customers access to cheap loans.

On the other hand, Kondratieff wave theory predicts a major recession occurs approximately every 40 or 80 years.  (1929, 1969, 2008)  A common explanation is that the generation (i.e. after 40 years) that has not experienced the excesses that led to the last recession, permit those conditions to recur.  So Bill Clinton was not really responsible for the current world recession, because he could only have enacted that legislation in a world that had forgotten depressions.  Or if he had not done the deed, then some other person would have done an equivalent thing.  For instance, in Australia, Paul Keating's compulsory superannuation legislation had a similar effect because it created a large pile of capital looking in a diminishing pot for investment grade targets.

Which leads us to the question of a solution.

Economists are divided on what solution to apply.  There are many schools, and so policymakers can find "sound" theoretical advice for whatever policies they find most advantageous to their constituency.

Since the November 2007 federal election the elitist party of the unions has been in power in Australia, and in the US the elitist Democrats (unions again) control the White House and the legislature.   If you belong to one of the "important" unions, (aka "Hard Working Australian") such as Lawyers, Doctors CFMEU, Journalists, Teachers, Nurses, PSU, or are a "core" unionized worker for Big Business, (Supermarkets, Banking, Auto Industry etc) then you will manage the depression with (at most) minor problems.  The conservative parties (Republicans, Liberal-Nationals in Oz) who represent small business (farming, retail, manufacturing, tourism up to ~$500 million) and their employees have been consigned to the opposition benches.

The Liberal US government (Obama) plans to spend $US800 billion on saving US banks.  There is talk that he proposes to create federal owned banks in which they will concentrate all the "bad" loans (Hence "Bad Bank".)   Given their druthers, the Democrats (the ALP in OZ) would nationalize all the big corporations and turn them into state monopolies.  That way their union supporters could always have well paid jobs.  If you want an example of such union driven liberal government, look no further than France.  High unemployment, but if you manage to get a job, dream working conditions & perks.

Rudd apparently hopes thereby to keep our banks solvent by maintaining prices of real estate, and industry solvent by financial support & restricting/taxing imports.  An example of existing legislation that exemplifies the liberal (i.e.ALP) political agenda in Australia is the mosaic of development control plans that give Westfield and their ilk a virtual monopoly on shopping malls, and prevents low cost small retailers from competing and driving down prices (e.g.Aldi, Wal-Mart) except in "approved" premises.  Another example is the "Big Four" banking policy,  whereby only four banks were favoured by legislation, permitting a quadopoly situation (and uncompetitive behaviour) to arise.

The Republicans (LCP in Australia) are for small business.  Farms, small retail, small industry, tourism, foreign labour.   They would destroy union power, create a lassaize faire economy with no inbuilt advantages to big corporates.  (like those enjoyed by Banks, Malls, Infrastructure etc).  They believe that Free Markets optimize productivity to the greatest benefit of everybody.

Unfortunately, both parties love big business especially financial institutions, because they (and their employees) are so easy to tax, and also pay huge bribes.  Big Corporations are fat milch cows for government, as opposed to small businesses, which are very nearly impossible to tax with the current tax system.

Barvennon's wishlist of OZ reform.
  1. Abandon the bank deposit guarantee, instead establish federal M0 + M1 accounts for all Australians, tied to citizenship (a voluntary "Australia Card"..  These accounts would pay the current central bank interest rate.  They would only exist online, and agencies would be licensed for any shopfront service necessary.   Until the current instability passes, banks could then borrow that money from the Federal Government.  This would guarantee financial transactions & stop favouring the oligopoly "big 4" banks.  It might well send some of them bankrupt.
  2. Gradually abandon personal & corporate income tax and GST, and shift revenue collection to resource taxes.  (Higher land tax, electromagnetic spectrum tax, minerals tax).  This would have the beneficial effect of lowering property prices.
  3. Gradually expand social security by offering "negative income tax".  This would be paid for by reducing the education and health budgets.This has the beneficial outcome of "not paying people to not work".
  4. Reform secondary and tertiary education so that the government involvement is limited to offering uniform, Australia wide certification exams in the various subjects and disciplines.  The process of education should be totally privatized and would be paid (perhaps by voucher?) from each child's "negative income tax".
  5. Introduce a "Schwartzenegger" amendment into the constitution, that would allow citizens to dismiss the government or amend legislation.
  6. Wind back all legislation that favours large corporations over small businesses.  Let local government develop their own LEPs. (Local environment policies) and permit shops anywhere that they want, or prevent development if they want.  (like the Brewery site in Sydney).
This is an incomplete article, and will be expanded further.

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