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In the 30s the biggest problem, involving credit anyway, was the lack of money to use for credit. Mortgages were entirely different then--they were shorter, and were often interest-only loans, that you paid the interest on for five or ten years, and then paid the lump sum principle at the end. The mentality then was that you owned a house of farm to help your business, and so the money was loaned to give you time to get your business or farm functioning enough to save the money to buy your house.
When the economy began failing, people could not pay their loans, and so banks forclosed so they could sell the property and recoup their losses. But so many people were defaulting that banks did not have the money to loan to the people who wanted to buy the foreclosed property. Banks were stuck with devalued property without the money to loan to anyone else to sell the property again, so they had no money to meet their own debts, and they began failing. When they failed, people lost all their savings, and this made more people panic, and they rushed to the banks to withdraw their money, and this caused more banks to collapse, and soon there was no money to loan to small businesses, or farms, or anyone other than rich corporations.
So, conversely, even though big banks were the ones going broke, corporations and big business came out ahead, because all the smaller businesses who could have competed with them for production or for labor were broke. Corporations could afford to pay less for labor. This is what's behind the Joads leaving Oklahoma in "The Grapes of Wrath." Corporate farms bought out the landholders and hired cheaper labor, so they kicked the share croppers off the farms. Meanwhile, farms out west advertised that they had jobs, so these farmers flocked west, only to find that there were so many out-of-work farmers that they had to work for nothing.
So, in short, the banks failed because they did not have the money to loan to businesses or homeowners, and that caused the economy to collapse. Amongst other causes.
So the government created FDIC bank insurance so banks wouldn't run out of money, and created Fannie Mae and Freddie Mac to make sure banks and mortgagors had money to loan. All of the government efforts were to shore up the banks and make sure that people had confidence in them.
The current problem is caused more by banks having loaned too much money, than by the banks not having the money to loan, although in the end it is the same result. And the people who will suffer if government doesn't do some form of bailout (not necessarily this one) are the average consumers who will pay higher interest rates, have fewer opportunities to buy homes, and ultimately pay more as inflation drives prices up and wages down.
So government wants to spend billions to head off that situation, and to prevent the type of money shortage we saw in the 30s.
I haven't studied the new plan enough to make an informed assessment of it, so I won't try. I'll say that the impression I have is that some of what's proposed is good--the basic idea that the government has to stop this collapse before it takes us all with it, for instance. What worries me is that the Republicans look like they are trying to "privatize it," giving corporations money to fix the problem, rather than, as we did in the 30s, giving corporations access to money through government insurance, and making the corporations themselves make wise decisions. That's backwards, and doomed to fail. With the old system, even the corporations had a vested interest in paying taxes. In this system, we seem to be setting them up as entities outside of public control or responsibility to the public.
Anyway, that's a nutshell of the problem. I don't know the solution. :(
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