9/03/2010

Newest piece at Fox News: What Milton Friedman Knew about the 1937-38 Collapse

I might have picked a title like: "What Milton Friedman Knew about the 1937-38 Collapse." But, in any case, my newest piece starts of this way.

Does the 1937-38 economic collapse, the so-called "depression within the Depression" offer any lessons on what we should do now? In 1937, it seemed that things were improving, some light was seen in the Great Depression, but unemployment suddenly jumped from 14.3 percent in June 1937 to 19 percent in June 1938. With the unemployment rate stuck at 9.6 percent, the Obama administration is planning to unveil what would be its third stimulus package. Supporters are pointing to the late 1930s to justify yet another increase government spending.

Today Keynesians are out in full force defending the massive $1.3 plus trillion deficit that we have run since Obama became president, warning that cutting it would lead to a scenario similar to what we saw in the late 30s.

Economist and New York Times columnist Paul Krugman, has this to say in The Times earlier this summer, declaring that those opposing more government spending were pointing us towards disaster: "It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession."

Last Saturday, Yale’s self-described "New Deal economist" Robert Shiller made the same point in an interview with The Wall Street Journal, attacking the "concern about the national debt" and advocating more government spending.

Both men point out that the federal deficit declined from $2 billion in 1937 (in inflation adjusted dollars, about $30.3 billion today) to a near balanced budget in 1938. . . .


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2 Comments:

Blogger Al B. said...

It's too bad that Milton Friedman is no longer alive. It would be interesting to put him in the same room as Paul Krugman.

Would they completely annihilate each other in a blinding flash of light?

9/03/2010 4:53 PM  
Blogger cory said...

John,

I think we would be remiss without adding that The Federal Reserve is the creator of the business cycle. Its very existence is a moral hazard. It plays with the interest rate (prices) via political needs. Even though it says it's neutral, it is most certainly not. The heads of the Federal Reserve have been bank insiders who specifically put their best interests over all others. When the federal reserve raises or lowers interest rates based on its reasons instead of what they should be based on market conditions, it creates inefficiencies that eventually lead to business cycles.

If interest rates are too low, more people borrow for the long term, expecting a higher rate of return on the borrowed funds. In reality, it sends the wrong message and redirects investment from more efficient and economically viable alternatives. In our current situation, the Fed created an investment boom in housing. People who couldn't normally afford house payments at market prices, could afford them at artificially low rates. The housing demand caused housing prices to skyrocket. Speculation was rampant. Also, supporting services and industries sprouted and grew alongside of the housing boom. This included home improvement centers, landscapers, loan processors, mortgage companies, construction workers, appliance wholesalers, hazard insurance companies, investment houses, etc., etc. Even new investment instruments grew up around the housing industry where banks could package groups of loans into securities and sell them to investment groups.

However, when you manipulate the market, eventually things must fall back to equilibrium. The bubble popped. The wealth created by inflation and rising property values was based on a false perception. People lost and are still losing their jobs, houses, and livelihoods due to the deception and mal-investment Fed policies created. In the end, the Fed's friends, like Goldman Sachs, Bank of America, AIG, and etc. all were paid because the Fed considered them "too big to fail" at the expense of everyone else out on the street.

This lie must end. The Federal Reserve must go. Bad business investments must be allowed to liquidate. FASB must make the banks show their assets (even the ones off books!) as mark to market. The reality is neither the Federal Government, nor The Federal Reserve, nor the banking and finance system of this country are too big to fail. Anything less is to the detriment of our welfare and our posterity.

Cory Brickner
http://www.capitalist.me/

9/03/2010 4:56 PM  

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