Scared yet? Sure, but don’t panic.

How long will it take and how bad will it have to get before a majority realize tax policy designed to reward existing wealth doesn’t bring strong growth. The best way to judge tax policy is to observe what happens in the following five years. Growth in the 5 years from 2004 through 2008 will tell the tell on Bush’s 2003 tax cut. History suggests it won’t be pretty.

The worst 5 year period in history was 1929 through 1933, GDP annualized declining 4.9% The top marginal tax rate in 1928 was 25%. During the best 5 year period 1940 – 1944 GDP grew at 13.7%. The top tax rate in 1939 was 79%. The best period not in W.W.II was 1933 -1937. GDP grew at 7.2% following the top tax rate being raised to 63% in 1932.

In the last 25 years the best 5 years was 1983 – 1987 growing at 4.5% coming of a 50% top marginal rate in 1982. The worst 5 years was 1989 – 1993 growing 2.2% a year after the top rate was cut to 28% in 1988.

When the top marginal rate is high the rich take less income, pay less tax, live less lavishly, but they invest more in their businesses, hire more people and grow the economy faster. The rich are paying too much in taxes someone needs to have the courage to raise the top tax rate and stop them.

The problem is fundamental – with a monetary system based on issuance of money (credit) backed by debt at interest to private banks, if the amount of borrowing even slows we enter a recession. Collectively we have been misled to believe that such is natural and inevitable, and it is with the monetary system we have.

This does not need to be the case. We do not have to have a government that pays $430B in interest to private lenders (FY 2007) and is continually at war because it forces the government as borrower of last resort to borrow to prop up the economy.

The government can issue money directly and keep the benefits of seignorage for the people, saving vast amounts of interest expense as well as not needing to fight needless wars. It would also eliminate business cycles, which are caused by expansion and tightening of bank lending and its impact on money supply growth (and the need to compete for $ to repay borrowing costs.

The approximately $2T the FED created over the last 6 months is doing nothing because of the basis of issue of FED money. The money goes into the hands of hedge funds, investment banks, etc and goes into asset bubbles rather than keeping the middle class from sinking beneath the waves. Until this nonsense ends and the public wakes up to the reality that is its monetary system this situation will not improve. With the distribution of money in our society and perpetuation of the existing trends a crash is inevitable.

Rob in FL: YOU HIT THE NAIL RIGHT ON THE HEAD!!!
Karen in Houston: Was it really surprising?
Since Nixon removed the gold standard altogether to allow for some “breathing room” in the dollar, it’s come to hyperventilation. Print on,dear Fed. A weaker dollar we dread…
Steve in Gloucester: stock up on $20’s?? For what purpose? A lumpier mattress? Surely you don’t believe those bills will buy a quarter of what they do now when the collapse hits? But I do enjoy your imagery so…
Joe in Miami: You…don’t..see the damage?
These cruises are essentially the last great “hurrah” to distract the frazzled working masses…not to mention, they were probably booked months ago, when things were not quite as bad (DID I JUST SAY THAT!!!???)
Peter in San Jose: Ahem….
Joe,also in San Jose: If you,as a company,needed money, wouldn’t you seek it out??? Doesn’t actually mean that the good times are rolling (probably more like heads).
The general consenus on this blog is that we are going to hell in a (borrowed) handbasket. Let me point out the basic accounting equation for Ben, Hank, George, hell, anyone who may need a refresher course: ASSETS=LIABILITIES+OWNER’S EQUITY
Hence, the more one borrows without repaying,the less equity one has in the “market” (or bank,or dollar, or home,you get the idea). Corporations are financed via debt (no need to explain that one) and equity (a guesstimate of the worth of a fraction of the whole business). Nothing is underlying the dollar except a promise that every hardworking U.S. citizen will provide sweat equity to balance the dollar (productivity). Nothing underpins a corporation’s balance sheet except confidence in the markets. Nothing underpins a consumer’s checkbook except his job, paid with dollars, and assets(???) like stocks, bonds, and more promises.
Ironic that FDR, who bloated a budget or two in his time as well, put it best: “The only thing we have to fear is fear itself.”
In all sincerity, we must support the dollar by sweating buckets of work equity,and not degrade it by printing more debase of its dopplegangers. We must get back to the basic accounting equation.
That, or decide what to do next, when this country has no more economy….

From the article:
“The financial markets are a mess. Inflation is a problem. And he can’t tackle both at the same time.”

It almost sounds as if you are saying these two issues are mutually exclusive. Interest rates held too low for too long and the absence of existing regulations caused this mess.

Now it’s time to let the market correct itself, not continue to create positive feedback loops!

This is one experience of my father’s generation I thought I’d never see – a full fledged world wide depression. Months ago I converted all of the paper assets in my control to physical gold and silver. My job is recession-proof, my mortgage at a low fixed rate and vehicles paid off. Let the games begin.

as i “X” out of the HP advertisement that pops up as a full page ad now, the current economic crisis is a result of greed on every level. A government that is tied so closely to big business and banking is a government that is careless to how the average american consumer is bombarded with money, spending, etc. They want us to spend, to build credit, to build debt. When times are good, the government is happy, big business is happy, and the general consumer is in debt. And when things turn sour as they always do and always will in a free market capitalist system, the government ducks its’ head and helps the big profit businesses that made the same mistakes that average americans make. I am very worried. When all is said and done, some of the elite/rich won’t be any more, some big business will fail, some middle class will go up, some down, and the poor will remain poor. Those not in power are whom make up the middle and lower class can do nothing. Not even revolt will solve anything since it would disrupt a relatively good daily life- esp compared to other countries.

It’s fun being young and fresh to the workforce and watching all of this happen around me. It’s pretty scary and makes me worried when you want to be able to buy your first house, pay your student loans, etc. I’d like to think that a new presidency will reestablish some faith in our economy, but I am not so sure at this point. What I am sure of, is that our Founding Fathers would be pretty ashamed of how some things have turned out in this country… I travel abroad quite a bit and have no qualms going ex-pat for the sake of my own family if it were to come down to it. I am just thankful I live in a part of the nation that is still holding itself up ok…

CHILL foks! The “second half” is going to be fine! The downside risks have diminished and inflation will moderate in the coming quarters… and everyone will live happily ever after. The End. Now be patriotic and buy those stocks!!!

Paul, this would be a great time to re-run your article from last week when you said concerns about Fannie and Freddie were overblown and that all investors needed was a cup of warm milk and a hug.

This is a rough time for many and it has been a long time comming. What goes up must come down right? Well here we stand with banks going out of business, major lay offs and oil prices that will force more americans out of there homes this winter season and hurt the housing market even more. I say hold on tight and watch every dollar you “throw” away. This is the time where the strong and smart will survive. It’s not just about how much you make but how much you SAVE! – Just make sure its is FDIC insured!

Listen to Jim Rogers. The Bush administration and the Fed have got us into this mess. They lie about the rate of inflation, they won’t tell you of all the banks and corporations stealing your money with worthless stocks and bonds issued. Better get some gold under the mattress, and soon!

It is amazing more than anything. This econcomical turmoil is proof that smarts does make a difference when running a country. The wealthy are probably not worried at all, but there are alot of people who will be devastated. Who cares?

America is truly an economy driven by the consumers more than anything else. Allowing gas prices to soar like they have and not stopping the spculators from hedging against inflation has pretty much destroyed our chance at any economic recovery in 2008.

Until the goverments of the world realize that a free market society that speculates on commodities that support live like food and energy (things we cant just stop buying when they get too expensive) we will all suffer through a deterorating economic downturn.

Anyone who has read any history will know that a war on two fronts is un-winnable.

We should either fight in Iraq and crash the economy or pull out and use the cash to fight the economy at home.

Read your ‘Sun Tzu’s Art of War’ that’s the only way we are going to survive.

Wow the thought that only 1 million Americans can not pay their house notes and that is enough to bring down the US banking system is a very interesting idea. Bernanke and Paulson are pulling the wool over people’s eyes that money is only a 30 billion dollar loss losing 15 percent and a 230 billion dollar loss losing 100 percent of the money. The FED has pumped 2 trillion dollars into the economy since last year.

This proves it is not the mortgage defaults causing the problem. The only thing big enough to cause this kind of damage is the US defaulting on it’s 9 trillion dollar national debt.

Yep you heard it right the USA is now officially bankrupt and our dollar is worth less than an Iraqi dinar.

Why do you think all the leaders are telling us everything is alright and not to worry? Things have totally fallen apart. We are not paying back the interest we owe on the national debt.

I’m more afraid about the Federal reserve and Washington then I am about the ailing banking and financial sectors. When the fed and congress start taking on so much bad debt on to its book, there is no end in sight. This is compounding the problem and exposing our economy which is literally a house of cards. If we lose our AAA credit rating, foreigners will stop financing our spending and when that happens, the government will print money until we ran out of trees. The consequence of this will always be the same time and time again hyperinflation. There is no room for further mistakes in our monetary policy.

Ron paul is right. We need to cut spending overseas. Our empire is stretch beyond its limits. Our foreign policy is flawed. No one talks about a balance budget anymore this includes the two leading candidates Mccain and Obama. Mccain wants tax cut which benefits the rich. Obama want to increase taxes on the rich to give to the poor. What are they proposing to help this country? nothing.

A message to my fellow Americans
It’s ok you know anything about the economy, politics, monetary policy and financial matters but at least elect someone who does like Ron paul.

Ben in Buffalo got it mostly right.

Of course to panic now would be a mistake,we aretoo close to the next FALSE rally. You should wait for the next FALSE rally off this intermediate bottom (Dow 11,000). Then GUESS when the false rally is over and SELL half of what you would like to be rid of. Then GUESS when the rally is “for sure” over and sell the remainder to get to your “sleep comfortable” level of stock exposure. Then wait patiently. The Dow will be nicely priced when it finally gets into the very low 10,000 range, but mid 9,000 is as close as we will get to a “sure thing” bottom. And it isn’t likely to get to these low levels without a few false rallys. Finally, don’t panic and get sucked into buying the false rallys and for heaven’s sake don’t watch CNBC!

Perhaps we just need to let the impact of bad decisions be felt by those who caused them. This means individuals AND the banks.

WHY?

This is an opportunity to educate business leaders and individuals on basic financial principals. Don’t borrow what you can’t afford to pay and don’t lend what you can’t afford to lose. Duh!!!

These are lessons that my parents and grandparents taught me (I’m 40). Sounds like these need to be re-learned by society today.

wait till the $300 trillion derivative time bomb blows up. that should kick the last leg out of the rickety table this house of cards built on.

pull your spare cash out now in $20 bills and stash it under your mattress.
cause it’s going to get real ugly real fast and by the time you go to get it out it’ll be too late.

http://www.portfolio.com/views/columns/wall-street/2007/03/29/The-300-Trillion-Time-Bomb

Also please tell me why the option of allowing some banks to fail (banks who made bad bets) is a better option than bailing out the American citizens.

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I am not for bail outs with tax payer money, but I’d prefer we let a few million Americans who are not repaying loans they signed for lose their homes rather than letting banks fail which would have a castrophic affect for the entire population of 230 million Americans.

As far as the doom and gloomers out there, personally I don’t see it. I am not saying economic times are not bad, but it is not the end of the world. I work for a major cruise line. Most of our ships our selling out before the actual sail date and therefore prices are up from last year. If things we were as bad as some try to paint things, our ships would be sailing half full like they did after 9/11.

Executives and corporations, the whole system are gone nuts. They are laying us off, increasing their own salaries and then hope that American consumers will pull them off the trouble. Now we depend on our imports to China, Russia, India… but nothing is “Made in USA” today. Everything was outsourced by that same CEO’s. We should not have any loyalty to our employers.

Don’t Panic!

But if you are going to panic be the first…

Dear Dallas TX,

Bernanke is a BANKER and he will bail out his banker friends before he bails anyone else out. Bankers think that they make the economy rather than service the real businesses that make economics happen.

We need a war on “economic terrorism”! This is 10 times worse than 9/11 attack.

The author continuosly cherry picks relatively less negative economic data. It makes sense, dosen’t it? How would it look if CNN were out there telling the truth about how bad things are and will continue to be? He has been wrong for many weeks now and has no credibilty.

We haven’t seen the worst yet.

In terms of whether or not there is “credit crunch” just ask the less than top tier credit risks, both personal and corporate, if they have money avaiable to them and at what price. The Fed just about eliminated stated income and hard equity mortgages today.

Ask the homeowners with HELOC’s why there oustanding credit lines avaiable have been closed by the lenders.

The evidence is everywhere. You don’t have look that hard.

Bear and IndyMac couldn’t fund their positions becasue they couldn’t borrow money. There will be more of this type of thing occuring with a few corporations thrown in.

Lets see, 1 Euro goes for 1.6
US dollar, US government wont be able to pay future bills, i.e social security, medicare for retiring babyboomers.
Infrastructure failing.
The general public is very busy watching American Idol and don’t seem to understand what “bad times” means.
Banks going under and being helped by the Feds, instead of letting them fail.
US financial burdens abroad (Iraq, Iran soon, military bases)
Oil reaching $200 by december, people wont be able to go to work.
The surburbs becoming slums. I am glad i am moving abroad, this place is turning into a third world.

Why hasn’t Bernanke and Paulson resigned yet??? As matter of fact, why hasn’t the entire Bush admin resigned yet???

LOL, we are going down fast. When the FDIC comes out and tells you the banks are fine and not to worry like the lady in charge of FDIC did today. That is when I start to worry and I have already taken out my money from the banks.

Let’s see Bear Sterns told people they were fine and then they went bankrupt. Fannie Mae and Freddie Mac said they were fine and even Paulson and Benanke said there was no bail out planned for them. Then those two went bankrupt a day later and the Fed had to bail them out.

If you know how to read the signs the FDIC’s acknowment that everything was fine is a signal to those in the know to get their money out of banks fast.

Why don’t all of these “financial experts” just simply admit that things are really bad and stop trying to sugar coat things? The “sugar coatings” just serve to rally the markets for a very short time and contribute to the wild fluctuations. We are in the beginning days of a deep economic depression that is going to last for a long time. It will be worse than 1929 and it will be a lot harder to solve because we no longer have the capability or capacity to produce anything. Too many people and companies are nothing more than rich on paper. They have no intrinsict value.

This is more related to the economy than to the markets. There are some things going on that cause me to question if there is a ‘credit crunch’ at all: I still get voicemails at home and junkmail in the mail about easy home refinancing. Also, I still see billboard TV ads about same, and a number of them are ‘easy, no money down’, too.

There seems to be plenty of credit available, if only the borrowers would start repaying the mortgages that they currently have, rather than allowing the foreclosure process to grind on.

Why does this guy write only “don’t worry everything’s gonna be fine” articles? It makes him look very silly.

The economy will continue to grow slowly, as the growing sectors (agriculture, electronics, energy, exports, health care, services, software, etc.) outweigh the shrinking sectors (finance, homebuilding, mortgage, realty, etc.).

The markets are murky, making this a bond-picker and stock-picker market. Bonds look likely to go sideways for a long time. Stocks depend on sector and company, with winners and losers. Finance will be hit the hardest because they have lost and are losing so much money. There will eventually be some winners in this sector, but there will also be finance companies who run out of money and have their stocks go to zero (such as IndyMac).

Too late to sell, too soon to buy.

If I’m your average American going to the store buying inflated groceries and gas, please tell me why I should care whether the big-shot banks on Wall Street don’t get to payout dividends and bonuses to their executives? Or why those who made bad choices during boom times should be handed a bailout by the Fed at the expense of Joe Taxpayer?

Bernanke’s options between helping the financial system and helping every American (a la rising inflation due to low interest rates) should have an obvious answer.

Also please tell me why the option of allowing some banks to fail (banks who made bad bets) is a better option than bailing out the American citizens.