Legendary economist Anna Schwartz, who co-authored the revolutionary Monetary History of the United States with Free Market Icon Milton Friedman, was recently interviewed by The Telegraph about the state of the U.S. economy. In the interview she gave the world a little good news and some bad news about the current subprime meltdown which, with able assistance from a doom and gloom media, is driving the U.S. into a hellacious recession.
The good news. It’s unlikely that there will be a Depression:
Schwartz warns against facile comparisons between today’s world and the Gold Standard era. “This is nothing like the Depression. I don’t really believe the economy as a whole is going to fall apart. Northern Rock has been the only episode of a bank failure so far,” she says.
Over 4,000 US banks – a fifth – collapsed in the 1930s. There was no deposit insurance. Real economic output fell by a third, prices by a quarter, and unemployment reached a third. Real income fell by 11 per cent, 9 per cent, 18 per cent, and 3 per cent in the years to 1933.
In other words, we thankfully live in a different time than the heady days of the gold standard Ron Paul and his cult of quasi-libertarians pine away for. It’s interesting that despite their protests to the contrary the mighty gold standard didn’t save America from the Great Depression, something none of them feel behooved to explain.
The bad news is really bad though. The Fed not only caused the Great Depression but is causing this recession to be worse than it has to be. Apparently the Fed has been consistently run by morons:
According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. “It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behavior,” says Schwartz.
She is scornful of Greenspan’s campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. “This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can’t be blamed on global events,” she says.
That mistake is behind us now. The lesson of the 1930s is that swift action is needed once the credit system starts to implode: when banks hoard money, refusing to pass on funds. The Fed must tear up the rule-book. Yet it has been hesitant for three months, relying on lubricants – not shock therapy.
“Liquidity doesn’t do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt,” she says. Her view is fast spreading. Goldman Sachs issued a full-recession alert on Wednesday, predicting rates of 2.5 per cent by the third quarter. “Ben Bernanke should be making stronger statements and then backing them up with decisive easing,” says Jan Hatzius, the bank’s US economist.
Bernanke did indeed switch tack on Thursday. “We stand ready to take substantive additional action as needed,” he says, warning of a “fragile situation”. It follows a surge in December unemployment from 4.7 per cent to 5 per cent, the sharpest spike in a quarter century. Inflation fears are subsiding fast.
Bernanke insists that the Fed has leant the lesson from the catastrophic errors of the 1930s. At the late Milton Friedman’s 90th birthday party, he apologized for the sins of his institutional forefathers. “Yes, we did it, we’re very sorry, we won’t do it again.”
The only reason the Fed won’t “do it again” is because the economy is too vast, robust and diverse for them to collapse it completely. But they can certainly cause a bunch of mini-depressions in the sectors they meddle in.
Meanwhile Gold has hit a record high against a weak Dollar which fell in value to under 100 Yen for the first time in over a decade. Gold is looking pretty good to some people but as I’ve stated on the ever neglected American Survival Blog gold is also in a bubble with its value driven by fear and the hard work of hundreds of affiliate marketers.
For you crazed survivalists out there gold is still a sucker’s bet for any TEOTAWAKI scenario you’re busily planning for, and the Yen and Euro performance against the dollar provided savvy investors with even better returns than gold. Had you started buying Yen a year ago, instead of hording gold, you’d have made the same killing or likely more because Yen were still cheap enough for you to really stockpile them.
With gas a t over $110 a barrel and grocery prices already skyrocketing, the next few weeks would be a good time to sell some of your gold to speculators and use the profit to stock up on non-perishables and long lasting staples while they’re still cheap. Yeah, I’m saying pawn your gold necklaces and stock up on shotgun shell and canned goods. I just wanted it to sound saner.
But the rough ride we’re in for will probably be short lived, though Democrats are doing their best to prolong the suffering, and if we keep our heads about us and don’t fall for the populist demagoguery of the left we’ll pull though this just fine.
No thanks to the Fed.
