(http://images.huffingtonpost.com/gen/15833/thumbs/s-STOCK-MARKET-large.jpg)
http://www.nytimes.com/2008/03/21/opinion/21krugman.html
QuoteIf Ben Bernanke manages to save the financial system from collapse, he will â€" rightly â€" be praised for his heroic efforts.
But what we should be asking is: How did we get here?
Why does the financial system need salvation?
Why do mild-mannered economists have to become superheroes?
The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s â€" and having refused to learn from history, we’re repeating it.
Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.
This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.
As the decades passed, however, that lesson was forgotten â€" and now we’re relearning it, the hard way.
To grasp the problem, you need to understand what banks do.
Banks exist because they help reconcile the conflicting desires of savers and borrowers. Savers want freedom â€" access to their money on short notice. Borrowers want commitment: they don’t want to risk facing sudden demands for repayment.
Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank’s care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises.
But sometimes â€" often based on nothing more than a rumor â€" banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false.
Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects: as the surviving banks try to raise cash by calling in loans, there can be a vicious circle in which bank runs cause a credit crunch, which leads to more business failures, which leads to more financial troubles at banks, and so on.
That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.
And we all lived happily for a while â€" but not for ever after.
Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free â€" partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system†that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.
For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages â€" with nary a regulator in sight.
As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.
In fact, however, we were partying like it was 1929 â€" and now it’s 1930.
The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses â€" but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.
Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant â€" not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.
Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.
Key distinctions between 1929 and now will prevent a repeat - unless the Dems take the White House. Here is a good article from an expert on the Great Depression. BTW, I would not seek financial advice from a failing business - the NYT.
QuoteHerbert Hoover's Ghost Haunts Markets, Democrats: Amity Shlaes
Commentary by Amity Shlaes
March 19 (Bloomberg) -- No question, Bear Stearns Cos. evokes the crash of 1929 and the Great Depression that followed it. Politicians are already making analogies to Herbert Hoover, the demon of that period, and Franklin Roosevelt, the angel.
On March 16, Senator Charles Schumer of New York said on television: ``We're in the most serious economic problem we've been in a very long time -- much worse than 2001. The president's hands-off attitude is reminiscent of Herbert Hoover in 1929 and 1930.''
Within 24 hours, Representative Rahm Emanuel, an Illinois Democrat, was weighing in with his own 1930s comparison. Roosevelt had pulled a country out of Depression and united it; President George W. Bush was doing the opposite, he said.
You get the picture: Bush is like Hoover, the do-nothing. Democrats are like Roosevelt, the activist.
It's worthwhile to go back to that Depression period to see what people actually did or didn't do and who resembles whom. The reality differs from the cartoon.
Come October 1929, and the first big drops in the Dow, President Hoover pleaded for market confidence. ``We are undoubtedly in a plane of prosperity, and we wish to hang on to prosperity,'' he told the New York Times.
On March 14, Bush made a similar pitch before the Economic Club of New York: ``We're a resilient economy, and I believe that the ingenuity and resolve of the American people is what helps us deal with these issues.'' So far, so Hoover-ish.
Housing Bailout Anyone?
To help homeowners and homebuilders, Hoover created the Reconstruction Finance Corp. Together that agency and the states poured billions of dollars into helping troubled banks and farm mortgage associations. Here, too, Bush, with his FHA Secure and other mortgage projects, recalls Hoover.
Yet Hoover made other moves -- he was more of an activist than the stereotypes about him allow -- and they resemble Bush policies not at all.
Hoover was a mining engineer, and to him the most real wealth was wealth in the ground -- copper, gold, coal.
He distrusted financial markets as ephemeral. When Wall Street crashed, he blamed the messenger. Specifically, he spent the early 1930s chastising short-sellers.
``Bear raids,'' he scolded, were ``not contributing to the recovery of the United States.'' The president sought new restrictions on short-selling, pressuring officials from the New York Stock Exchange to the Chicago Board of Trade to curtail the practice. This meddling caused more uncertainty.
Schumer the Hoovermonger
Who is doing such pressuring these days? Not Bush, but that Hoovermonger, Schumer. Schumer used the Bear Stearns collapse to call for ``a greater degree of regulation'' in the industry that is relevant this time, investment banking.
Hoover knew free trade was beneficial. But his party, the Grand Old Party, was the tariff party. So in spite of himself, he signed a big new tariff, the Smoot-Hawley act, triggering retaliation from U.S. trading partners.
For many decades now, Democrats have contrasted Hoover's concession to protectionists unfavorably with free-trade legislation written by Roosevelt and his globalization guru, Secretary of State Cordell Hull.
Today it is the Democrats who are doing wrong, and they know better. Candidates Hillary Clinton and Barack Obama are both internationalists by temperament, yet they seem to be in a race to see who can repeal the North American Free Trade Agreement first.
Channeling Hull
Bush, by contrast, was channeling Hull when he called a plan to reject a new trade accord with Colombia ``a terrible signal.''
Finally, there was Hoover's tax policy. Today every fool, right or left, knows that imposing a tax increase in an economic downturn is like kicking a wounded man in the stomach.
Yet in the dark days of 1932, with unemployment at 20 percent, Hoover perversely signed an increase that reversed the multiple cuts by his predecessor, Calvin Coolidge.
Hoover more than doubled rates at the bottom of the tax schedule. He also increased the top marginal tax rate to 63 percent from 25 percent. The effect was predictable. That tax error has haunted economists ever since.
Yet today it is not Republicans but Democrats who are preparing to replicate it. Obama has suggested a payroll tax increase and an income tax increase; together they would just about offset all the breaks created by Bush. Clinton is scarcely different. Who's Hoover now?
All the Hoover-izing has obscured a disturbing resemblance -- that of Bush to Roosevelt on currency. FDR knew that the dollar needed reflating, but monetary policy wasn't his area, so he was at a loss for a method.
Reflation Machine
At one point, he even tried to turn himself into a one-man reflation machine, buying commodities -- each morning at a different price -- in the hopes of moving the greenback.
His uncertainty kept the market down in the fall of 1934. You don't hear Democrats these days racing to claim the currency component of the Roosevelt legacy.
Bush, too, is no dollar expert. He has bumbled his way to trouble on money. The one risible line in his presentation last week was ``we believe in a strong dollar.'' You can't say that after all the drops in the currency that Bush and Treasury Secretary Henry Paulson have allowed.
So the 1930s have plenty to tell us, yes. But the real challenge isn't deciding who resembles Hoover. The challenge is for both parties to figure out how to avoid a whole era of mistakes.
To contact the writer of this column: Amity Shlaes at ashlaes@bloomberg.net.
http://www.bloomberg.com/apps/news?pid=20601039&sid=alBsmRS72DyM&refer=columnist_shlaes
Quote from: RiversideGator on March 22, 2008, 01:01:19 AM
Key distinctions between 1929 and now will prevent a repeat - unless the Dems take the White House. Here is a good article from an expert on the Great Depression. BTW, I would not seek financial advice from a failing business - the NYT.
Stephendare; note that Dear Leader Riverside Gator has by inference stricken the New York Times from the list of approved publications permissible for quotation. Conduct yourself accordingly.
Quote from: Midway on March 22, 2008, 12:45:55 PM
Quote from: RiversideGator on March 22, 2008, 01:01:19 AM
Key distinctions between 1929 and now will prevent a repeat - unless the Dems take the White House. Here is a good article from an expert on the Great Depression. BTW, I would not seek financial advice from a failing business - the NYT.
Stephendare; note that Dear Leader Riverside Gator has by inference stricken the New York Times from the list of approved publications permissible for quotation. Conduct yourself accordingly.
You can quote the NYT all day long, but use them for business advice at your own peril.
FYI, this is the real "Dear Leader" and he is one of your boys - a communist:
(http://www.enterstageright.com/archive/articles/0103/012702jongilkim.jpg)
Is that the riverwalk behind you? Nice hairdo by the way. :D
I thought you would have embraced a fellow leftist like Kim Jong-il, midway. Of course, we both know that you know him.
Ad Hominem attack!! :o :o