Right Thinking From The Left Coast
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Systemic Risk for a Trillion, Alex

From the people who brought you the first great depression, and helped with this recession, comes the likelihood of more authority.  Yes, the Federal Reserve may be the new grand regulator to monitor risk.

As is always the case with government screw-ups, and government backed screw-ups from the so-called private institutions like the Fed, those who helped bring about the mess ALWAYS get rewarded with more power. Nope, there will be no regulation or oversight for the worst offenders, because they are the ones looking out for us. Now if you want to think I’m exaggerating a little in blaming the Fed for the first depression, and what may turn out to be a long and drawn out stagnant pain fest for the modern era, I bring you Bernanke’s view of the cause of the first depression.

Bernanke’s speech in 2002 honoring Milton Friedman

For practical central bankers, among which I now count myself, Friedman and Schwartz’s analysis leaves many lessons. What I take from their work is the idea that monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman’s words, a “stable monetary background"--for example as reflected in low and stable inflation.

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Bernanke’s reasoning behind the first depression was bad monetary policy, which started the downturn, and how the Fed stood by and let the banks fail via banking runs, but what’s also important to note is back then the banks already had a solution to prevent such havoc regarding banking runs, and the market did ok on monetary policy too, and it actually worked until the Fed came around and took over monetary policy and crisis management.

Before the creation of the Federal Reserve, Friedman and Schwartz noted, bank panics were typically handled by banks themselves--for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals. Though not an entirely satisfactory solution--the suspension of payments for several weeks was a significant hardship for the public--the system of suspension of payments usually prevented local banking panics from spreading or persisting (Gorton and Mullineaux, 1987). Large, solvent banks had an incentive to participate in curing panics because they knew that an unchecked panic might ultimately threaten their own deposits.

In the modern day with an already expanded Fed that’s grown over the decades as a reward for the pain they helped cause in the first depression, we now see the results of a Fed that had loose monetary policy for too long during the housing bubble, years of rules and regulations that brought about bigger banks who will always survive because we bail them out at the expense of the small ones, and along with bad government policy with the everyone deserves a house mentality, well here we are. Yes, the bankers have their share of the blame, and we get to see it all over the news, and we get the reminders to thank God the government and Fed are here to save us.

If you are skeptic like me though, don’t worry, in this era of swelling government intervention with such vast power in the hands of a few, surely someone will monitor the Fed. Well, maybe not. If you have not already seen the discussion between Democratic congressman Alan Grayson, and the Inspector General for the Federal Reserve Elizabeth Coleman, I suggest watching it. Try to count how many times Grayson asks her where all that money went. I mean no big deal if there aren’t any answers, she’s only the Inspector General for the Fed. Also, notice what is missing. A packed room full of reporters, angry crowds, and congressional leaders looking for that photo op. Anyhow who cares, what’s a few trillion among friends with zero oversight? There’s no risk in that.

Posted by on 05/28/09 at 10:13 PM (Discuss this in the forums)


Posted by on 05/29/09 at 08:16 AM from United States

Love the title!

Posted by on 05/29/09 at 11:56 AM from United States

Great post.  Well done sir.

It’s the classic deflation vs. inflation debate.  We are told repeatedly that the US is facing economy-smashing deflationary forces.  This is a fallacy.  Deflation is not a fall in prices.  Deflation is a decrease in the money supply.  As everyone here should already know quite well, the money supply is certainly not decreasing.  Prices naturally fall in a recession because they were artificially bid upward during the central bank-induced boom period.  Prices must fall to allow the necessary correction to take place.  Allowing the banks to fail in the 1930’s did decrease the money supply as all the fiat money that existed only in its imaginative form was erased.  What exacerbated that recession was Hoover’s meddling and interventionism and FDR expanding upon said intervention. 

Remember the depression of 1921?  Probably not.  Why?  It did not last long.  The government lowered taxes, cut its budget and ultimately did nothing.  The end result? The recession ended rather quickly.

Also it should be noted that free-market banking has not existed in the US since probably 1860.  The history of banking in the US is defined by the various attempts by government to establish and maintain a central bank that would serve the interests of the political elite.

Still, this post rocks.  Again, Section8, well fucking done.

Posted by on 05/30/09 at 11:21 AM from United States

Well thanks. I just think via our schools, media and so forth, the entire story of what went on is ignored and replaced with the pop culture view of speculators and the greed of private industry that was at fault. They had their share of the blame, but rarely will you see an educator with the integrity to analyze what role the Fed had to do with it. And as far as what’s put out in the media.. useless as always.

Bernanke flat out says “We did it, we’re sorry.” regarding the follies in policy up to and during the Great Depression. FDR gets credited for coming up with a banking holiday when it is clear that strategy was already in place before the Fed and government stopped it.

It’s just shameful how the people of this nation have been duped time and time again (includes me on occasion) into thinking that the government is the great savior when in fact many times they are the ones burning the place down to begin with, but how would we know when those in charge of educating us and spreading the news don’t want to talk about it.

Posted by on 06/01/09 at 08:34 AM from United States

Again, well-said.  Bernanke places blame on the Federal Reserve in the 1930’s because the Fed did not increase liquidity as it is doing now.  Bernanke is of the Milton Friedman approach—the monetarist approach.  It is because of this theoretical stance that I conclude that Milton Friedman was not a truly free-market economist and advocate.

FDR is granted credit for “fixing” or “saving” the economy during the Great Depression because government and state-worshipping historians that know nothing of economics have ensured FDR would be enshrined.  Also, Keynesian economists profess love and admiration to FDR.  How oddly comical it is that just about every major Keynesian economist predicted that after WWII the US would slide deeper into a recession due to the US pulling back on its spending.  In actuality the US had a full and robust recovery—not in spite of the lack of spending but quite simply because the decrease in spending freed resources and capital for private sector use.

You are completely correct that the US lies.  All governments lie.  Abraham Lincoln is admired greatly, but in reality, he was a despot, a war criminal, and a mass murderer.

The revisionist version of US history is dramatically different than that of the mainstream, taught-in-public-schools, version. 

You are correct again on the state of education in this country.  The resolution?  Privatize education.  Also, stop subsidizing collegiate academia.  But do not say such things publically—you will be crucified and involuntarily sacrificed upon the altar of political correctness and state idolatry.

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