Weekend Economists Waiting for FDR July 13-15, 2012

[Demeter]

30. How Out-of-Control Credit Markets Threaten Liberty, Democracy and Economic Security By Ed Harrison

http://www.nakedcapitalism.com/2012/07/how-out-of-control-credit-markets-threaten-liberty-democracy-and-economic-security.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

The awful experience of the Great Depression made clear to many economists and laymen alike that credit is at the heart of a functioning capitalist system. Without access to credit, many businesses die and many individuals and households run out of money and go bankrupt. Yet in popular media accounts from the Great Depression, the focus is almost always on the stock market and the Great Crash of 1929. You hardly ever hear that it was the contraction of credit and the seizing up of credit markets that made the Great Depression so traumatic.

In 1932, Hoover acknowledged the importance of credit to a crowd in Des Moines, Iowa: "Let me remind you that credit is the lifeblood of business, the lifeblood of prices and jobs." He was right about the vital part credit plays in the economy. (But he got a whole lot else wrong. His speech was part of a campaign of anti-foreigner rhetoric designed to insulate himself from blame for America's economic depression building on his watch.) In his Des Moines address, Hoover cited the strangulation of credit caused by "foreign countries" which "drained nearly a billion dollars of gold and a vast amount of other exchange from our coffers." The president further blamed "some of our own people who, becoming infected with world fear and panic, withdrew vast sums from our own banks and hoarded it from the use of our own people." That's why the Great Depression happened, Hoover said.

Hoover was way off about who and what was at fault. He had been told so a year earlier in 1931, when he tried to blame the depression on a lack of liquidity and proposed that the government make funds available to banks to alleviate their liquidity problems.

The response from an official at the New York Fed:

"…In this district, where I happen to be more familiar with the situation than in other sections of the country, the principal cause of bank failures has not been a lack of liquidity but rather insolvency caused by need for a drastic write-off in bond portfolios. In other districts, I understand, many banks are threatened with insolvency because of losses in real estate loans as well as bonds."

Sound familiar? It should. We've been dealing with many of the same problems in the current banking era.

MORE