Mar

The Emperor’s “New” Clothes

There are few things more distressing than economic depression. The nation (and world generally) have been mired in fear and doubt concerning our economic well-being ever since the cataclysmic market collapse of September 2008. At that critical juncture, governments stepped in to “rescue” the economy, TARP and “Stimulus” being only more memorable legislative actions.

Here we stand, 17 months later, and economist Nouriel Roubini, who is widely acclaimed to have predicted the crash, is warning of a potential “double dip recession.”

Now, Roubini is no free-market economist. The bits and pieces I’ve read by him suggest that he sees government spending as the cure for depression; in other words, he is an interventionist.

Frankly, I’m old-fashioned and can’t take the cult of personality around Roubini. He’s no god; he’s only as good as his theory. I don’t find his economic theory up to snuff, and I think he makes very poor policy suggestions. Nonetheless, it is telling that even such an esteemed interventionist as Roubini fears a second crash, despite the record levels of intervention.

As an alternative, I would recommend, for anyone who appreciates sound economic theory and the careful study of history, a brief section out of Murray Rothbard’s “America’s Great Depression.” A taste:

If the Federal Reserve had an inflationist attitude during the boom [of the 1920's], it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks… Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state. This enormous expansion was generated to prevent liquidation on the stock market and to permit the New York City banks to take over the brokers’ loans that the “other,” non-bank, lenders were liquidating. The great bulk of the increased reserves—all “controlled”—were pumped into New York… The Federal Reserve also promptly and sharply lowered its rediscount rate, from 6 percent at the beginning of the rash to 42 percent by mid-November. Acceptance rates were also reduced considerably.

By mid-November, the great stock break was over, and the market, falsely stimulated by artificial credit, began to move upward again. Standard and Poor’s stock price monthly averages, which had climbed from 56 in mid-1921 to 238 in September 1929—more than quadrupling—fell to 160 in November, a one-third drop in the course of two months. By the end of the year, stock prices had risen by several points. The stock market emergency over, bank reserves declined to their pre-crash levels…

The total money supply, as gauged by member bank demand deposits adjusted and time deposits, increased slightly—by about $300 million—during the final quarter of 1929.

President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates. Hoover had done his part to spur the expansion by personally urging the banks to rediscount more extensively at the Federal Reserve Banks.

If we change the president from Hoover to Obama, update the years and the monetary figures to account for inflation, what is so different about today?

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