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It's true. FIRE did break the economy, and recessions caused by financial system failures are always much worse than when caused by declines in other sectors.  However, as at least one of the economists in the list in this diary have shown -- Schiller -- the reason that FIRE can do so much damage to the economy is precisely because people think it is much more critical than it really is. When the farming sectors faces trouble, the rest of the economy doesn't worry, even though it potentially means a threat to local food supplies.  But when banking goes bad, everyone goes crazy, even though the worst thing that can happen is that some people won't get their loans repaid.  Go figure.
by santiago on Sun Jul 12th, 2009 at 10:13:41 PM EST
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When the farming sectors faces trouble, the rest of the economy doesn't worry, even though it potentially means a threat to local food supplies.  But when banking goes bad, everyone goes crazy, even though the worst thing that can happen is that some people won't get their loans repaid.

Our government and society is no longer organized for the benefit of farmers.  For more than a century our society and government have been organized for the benefit of those with lots of wealth, call them the capitalists.  That organizing effort has increasingly come to be exercised through the big banks.  That organization extends to media and to educational institutions.  So we have been conditioned to see a danger to the banks as a danger to the society, whether it is or not, and we have been conditioned so as not to be able to imagine a society not dominated by the wealthy through big banks.

A grave threat to our agricultural sector would not be perceived as being nearly as significant as a less serious threat to the banks.  In fact our response to such a threat to agriculture will probably be like that of the frog that fails to jump out of a pot of water that is being heated while it still retains the ability to do so.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 12th, 2009 at 11:38:33 PM EST
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In a monetary production economy, when the commercial banking system goes crazy, the worst thing that can happen is that nothing is produced and everyone starves ... since in a monetary production economy, money is the institution that is used by going concerns to claim control of productive resources in advance in order for production to proceed, and banks are responsible for the creation of the majority of the money supply.

Indeed, while the farming sector was already in trouble in 1930, the bank collapses of 1930, 1931 and 1932 certainly made that worse.

Which is why the major reform of the First New Deal that stands with the multiple reforms of the Second New Deal is Glass-Steagall, which did not allow commercial banking to play with the dangerous part of FIRE. The very same FIREwalls that the commercial banking system has been engaged in tearing down ever since.

If Glass-Steagall does not work over the long term in a financial-market dominated system, because of the ongoing efforts of commercial banks to act as middlemen for the financial markets, that seems to imply that a financial-market dominated system itself is untenable.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jul 13th, 2009 at 12:31:25 AM EST
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