Depression 2.0 or Depression Lite?

Big question that is getting thrown around. Probably depends partly on where you live and what your occupation is. First lets take a look at a very interesting poll form the American Research Group. Usually one does not see goose eggs in a legitimate poll - but here we are:

National economy	Getting better	Staying the same	Getting worse	Undecided
Sep 2008	-	13%	82%	5%
Aug 2008	18%	19%	60%	3%

That is correct - no one across the entire spectrum feels that things are getting better.

Now onto the question how to make things better. So many people really want to believe that the bailout will change everything. This magical $700 billion can eradicate all of the forthcoming problems and prevent a serious meltdown. Here is an article from a US News blog taking the assumption that the Bailout Prevent Great Depression 2.0. Secretary Paulson's magic $700 billion will prevent a collapse of the market. Even though the Fannie and Freddie promise last month did not seem to do anything. But let's take a look at the post -

OK, let's run the numbers. Paulson is asking for $700 billion. But that massive amount doesn't include previous government actions to cure the credit crisis (like propping up Fannie Mae and Freddie Mac), nor does it take into account money the government may get back from selling the bad assets it will be purchasing. So let's say those situations cancel each other out, and we are really talking about $700 billion. Now that money is being borrowed. So you take $700 billion borrowed for 30 years at prevailing interest rates, and you are talking about $2.5 trillion. But as Paulson said last week, "I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion."

Now let's do the math on the "alternatives." What would doing nothing cost?

1) Scenario 1: Great Depression "Lite." This is supposed to be the worst financial crisis since the 1930s. So let's assume that the total freezing up of American and global credit markets caused something half as bad as the Great Depression. From 1930 through 1933, the U.S. economy shrank by about 25 percent. Now let's say that by doing nothing and letting Mr. Market do his worst, the $12 trillion U.S. economy shrinks by half that amount (12.5 percent), or around $1.5 trillion over four years. (Also, figure a near doubling in unemployment.) But there's also the opportunity cost of not returning to growth, even at a so-so 2.0 percent a year. Doing nothing costs $1.1 trillion more in lost growth. So now we are down $2.6 trillion.

...

2) Scenario 2: Great Depression 2.0. The economy shrinks by 25 percent over four years, or $3.2 trillion, plus $1.1 trillion in lost opportunity growth. Economic cost: $4.3 trillion. The market falls two thirds from its peak, losing $7 trillion in value from its current level, plus $3 trillion from not getting a rebound. Stock market cost: $10 trillion. Housing falls an additional $10 trillion from current levels, plus the lost opportunity of $2.5 trillion from a rebound. Housing cost: $12.5 trillion. Total four-year financial and economic cost of doing nothing: $26.8 trillion.

See that magic $700 billion and Secretary Paulson can prevent a meltdown. At least until the next round of begging and bailouts...