Why You Need to Understand the Economics of the Great Depression

4.11.2010

If you really want to follow the process of decision making today, and you want a reason behind the poor financial decision-making by the Federal Reserve and the Bush/Obama administrations, then you NEED to study the history and economic events of 1920-1946. And, I have some recommended reading below.

Picture from the Franklin D. Roosevelt Library, courtesy of the National Archives and Records Administration

Why study that?

Basically, Ben Bernanke is using the decision-making during the Great Depression to guide his monetary policy. In a nutshell, he feels that during that time, there was not enough LIQUIDITY provided by the Fed (i.e. lending availability) and therefore the economy collapsed more than was necessary. In other words, it would not have been so bad after 1929 if the Fed had just pumped more money into the system – and that is why Bernanke is doing what he is doing now.

Also, since most (if not all) elected leaders and central bankers follow Keynesian economic theory (I learned this prominently in my economics classes), they believe that government stimulus must follow a recession to prevent too deep of a drop. This explains (somewhat) the bailouts and taxpayer money going to AI Government (AIG), Government Motors (GM), and Government Sachs (GS).  We can’t have people lose jobs and expect to get reelected right?

Therefore, knowing the above, you must – if you actually care about your country – study what actually happened. Let me offer a good article to whet your appetite:

Denninger – Trichet Speaks – Is the US Listening?

For a more thorough education, I want you to consider reading a great book that was recommended to me:

Economics and the Public Welfare by Benjamin Anderson (wikipedia bio)

ECONOMICS AND THE PUBLIC WELFARE

This is a fantastic (but dry) read. it lays out what the Fed did to help CAUSE the 1929 crash  – by creating EXCESSIVE CREDIT GROWTH (sound just a TAD BIT familiar???? i.e. housing bubble????). And pumping the liquidity after didn’t help. It’s just understood, especially by people that have NO ECONOMIC training that when you get too drunk, you’re going to be HUNG OVER. 1929 was the peak of tremendous financial drunkenness, and it took a decade to clean out the EXCESSES. In 2006/7 we hit a peak of a housing-price-inflamed bubble that followed the collapse of a stock market bubble. We are only a  couple of years into the cleaning out process but here is the key:

WITH ALL OF THE GOVERNMENT BAILOUTS AND ‘RESCUES,” NOT MUCH CLEANING OF EXCESSES WAS ALLOWED TO HAPPEN OVER THE PAST 1.5 YEARS – SO WE WILL LIKELY NOT RECOVER IN REAL TERMS (wikipedia definition) ANYTIME SOON UNTIL EXCESSES ARE WASHED AWAY – ONE WAY OR THE OTHER.

Cleaning out involves bankruptcies, reallocation of capital from weak businesses to growing businesses, and corrections in prices of things. With the token exception of Lehman and Bear Stearns, we had NONE of that. just look how all of those zombie executives, that drove their companies off the cliff, collected fat bonuses just one year after a bailout. They should have all been fired. And if they found new jobs somewhere else, so be it, but not on taxpayer funding.

Bottom line – decision making being done today is using a certain interpretation of how policy response should have been in 1929 and beyond. I am recommending you analyze this data for yourself and consider that another path might be better.