Calm Before the Storm

7.15.2010

As I mentioned before, “News from 1930” is a treasure of a website for us history buffs – full of great insight into the headlines of the time, you get a very strange feeling that we really do repeat the same thinking & actions – using different inputs- and that humans are the same in their thinking/responses regardless of era or place.

From the site News from 1930:

Another special reader response edition – a belated reply to Onlooker, who wrote a week or two ago asking if he was accurate in remembering reading about big companies building up cash earlier in the blog, since we’re hearing similar things today. In fact, the same thing had struck me, along with another strangely familiar theme – the idea that apparently became widespread in the 1920’s that the business cycle had been tamed to some extent thanks to better economic information and policy (today commonly referred to as The Great Moderation).

and regarding specific commentary in the WSJ at the time:

Jan. 2, 1931: C. Snyder of Fed. Reserve NY: Contrary to “phantasies of a ‘new era’ of unending prosperity so widely prevalent but little more than a year ago,” it’s clear that the business cycle is still with us “in all its force.”
Mar. 2, 1931: W. Muller, NY Curb Exchange pres., says 1930 left lasting impression on financial world, refuting conclusively the “plateau of prosperity” theory that had overtaken the “business cycle” theory in 1928-29. Even in early 1930, stubborn belief persisted that the business cycle had been defeated, as “organized and determined” multi-billion effort was exerted by business to “dissipate by intervention the already existing forces of depression.”
June 25, 1931: NYSE pres. R. Whitney reviews events of past year. … After the 1919-22 depression, much study was devoted to statistical and economic research, particularly toward understanding of the business cycle. “Unfortunately the long period of great prosperity from 1925 to 1929 persuaded many … that the business cycle had been definitely abolished, and that it had become possible steadily to increase general prosperity indefinitely, without the danger of serious depressions.”
Feb. 20, 2004: B. Bernanke. One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. [What the …. how’d that one get in there? Must be some sort of virus …]

Many well-known economists, including Mr Bernanke, previously felt, and of course by their actions still do feel, that government spending and money printing can moderate any financial turbulence. They though that in 1928 and they thought that throughout the 1990’s – as the Federal Reserve simply opened the floodgates to cheap money anytime the economy got a little sick. Both times it was simply the calm before the storm

We still have to pay for that foolishness…