Earlier this week, Robert Higgs, Senior Fellow in Political Economy at The Independent Institute, spoke about the similarities and differences between the Great Depression and the current recession at the Economic Liberty lecture series. Although he finds considerable differences between the two events, he feels there are only a few similarities between the Great Depression and the current recession.
Below are my notes of his presentation.
http://www.vimeo.com/6966224There are some similarities as well as differences.
The media and journalists have rushed to see these similarities.
I was shocked.
The Great Depression was so much more horrible, devastating, than the current recession.
They were using this talk to sell some type of policy to the people who look to the government for answers.
I don’t feel the two events are fully comparable.
People would be much happier living through today’s recession than during the Great Depression.
In order to understand the Great Depression, a person must study the events leading up to the Great Depression starting with WWI.
The Fed tried to help the Bank of England return to the gold standard following WWI.
They created easy money in several spurts during the 1920s.
The Fed kept interest rates artificially low and encouraged other types of investments that otherwise wouldn’t have been profitable.
This encouraged long-term investments in the 1920s – housing construction, office construction, mines, etc. – what the Austrians call malinvestment.
Monkeying with the interest rates brings about malinvestment.
This easy money also helped drive the rise of the stock market – especially in 1927 to 1928.
Consequently, these malinvestments were finally seen as malinvestments over the course of a few years.
This led to the stock market crash.
There was a real estate boom and construction boom that peaked in 1926.
Real estate trusts were created – remember that easy money attracts the criminal type.
Holding companies were created – holding companies for holding companies for holding companies.
Pryamiding ownership provided greater leverage in order for investors to get a large return on investment.
But what happened recently?
The Fed kept interest rates extremely low.
This caused a real estate boom in the midst of rising real estate prices.
Also a return of financial gimmicks such as derivatives.
These were pyramids again – a tiny investment can get a gigantic payoff – its all about leverage.
Only problem is that this model assumes that house prices have to rise forever.
Some actually believed this.
They forgot their history.
House prices have gone through cycles for over a century – one of the most documented things in economics.
As house prices fell, people couldn’t refinance.
Mortgage delinquencies also started to rise.
Consequently the pryamids (derivatives) started to fall – all over the world – toward the end of 2007.
The market fell apart in 2008.
Then real estate development was not seen as a good bet.
On the southwest coast of Turkey noted a few years ago along the Aegean Sea a series of high-rise condos. Hundreds of them. This was in the spring of 2008.
Almost all of them had been abandoned.
The investors had given up on them.
People were only living on the first few floors – the higher floors had not been completed and were empty.
This confirmed that the Austrian economists were right about the business cycle – living proof of the business cycle in Turkey.
In 2003, 2004, 2005 these condos were probably seen as a good deal.
But this all hinged on things that were made of error.
M2 grew 2.5 times as fast as national output between 2001 and 2006.
Money was easy and interest rates were low and this spilled out into the whole world.
These are similarities in the lead up.
There were some other similarities in the bust as well.
The U.S. market began to tank in 2008 and the stock market lost half its value.
By the end of 2008, $8 trillion in losses in the stock market.
In 1930’s the stock market dropped and then started up again.
It was called the sucker’s rally.
Herbert Hoover said everything would be Ok.
Irving Fisher – the greatest economist at the time – told people not to worry. He told people to buy back in.
After that the sucker’s market started to drop in the spring of 1930.
By 1935 the stock market had lost 85% of its value.
Derivatives had also lost.
In the Great Depression the decline lasted at least four years before it leveled out in 1933.
In contrast, between the 2nd quarter 2008 and 2nd quarter of 2009, national output dropped 4%.
In comparison, GDP fell 30% during the Great Depression.
Bank failures – from 1930 to 1933 – 10,000 banks failed.
1/3 of all commercial banks failed.
We are not in that area at all yet.
The government took active measures then as now.
Some are similar while some are different.
In my opinion, the Hoover administration did almost everything wrong.
Hoover was an activist, progressive president.
When the economy stalled in 1920 to 1922, the government did nothing.
By 1923 the depression was over – it was very sharp but short.
This is called the balance effect in economics.
Since 1929 the government has always done something.
Mostly wrong.
In 1930 Hoover created high tariffs.
This created a trade war.
Every government tried to protect its own producers.
This is one of the most destructive measures a government can take.
This country is going down the same path now.
Chinese tire embargo.
The Chinese embargo of the U.S. poultry industry.
This was a bad move by Hoover.
Hoover thought it best if wage earner’s wages were kept high.
But demand for good and services were falling.
Consequently wages should have fallen too.
Hoover got together the leading labor unions and others to sign up to his plan to not cut real wages.
So many went along with his plan and this caused a distortion in real wages which actually went up.
Rising real wages caused greater unemployment.
By 1933, 25% of the labor market was out of work.
Another 25% were working less hours – called spreading the work.
Half of the work force was not fully employed.
Unemployment was 60% in some places like Youngstown, Ohio and Pittsburgh, Pennsylvania.
If you graduated from college in 1929, you may not have found a job for 10 years. Many did odd jobs, relied on parents and friends. Just to get by.
My father never went without work for long.
He worked all day cutting a cord of wood for a dollar a day.
A lot of work for little pay.
My family moved to Arizona to pick cotton – not for much money.
The government made it possible for workers to get money without requiring people to work.
Jobs were selected by the politicians – many built sidewalks, created murals, put on plays, etc. – all to put people to work. Make work.
Made a lot of people grateful for the Civilian Conservation Corps.
The government put people in the parks, etc.
Those circumstances didn’t have to exist if the government had not created the situation in the first place.
There were big tax increases.
In order to help big companies the government purchased preferred shares – similar to what happened with TARP.
The government purchased worthless assets.
They are now going to use this money to buy toxic assets.
The government is now putting $3 billion to buy troubled assets – banks are holding over $1.4 trillion of these assets. In other words, the government is planning to purchase less than 2/3 of 1% of these assets.
Makes you think there is some kind of hanky-panky going on.
Last September there was a “panic”.
I don’t watch TV – only the Seattle Mariners.
Last September I watched some of the financial channels. They were full of “barking dogs” except they were human beings.
I thought the world had gone to the dogs.
Everyone seemed to have lost composure.
Hank Paulsen would bark.
Then Ben Bernanke would bark.
That’s how the government was yelping.
Congressman Ron Paul wrote after the bailout bill on October 3 and made fun of the situation. Was the market “melting down” or “freezing up”? Few demonstrated understanding of the credit markets. All that was happening was the government was saying they needed lots of money or everything was going to “melt down”.
There was a lot of ebb and flow in these melt downs.
The quality of economic analysis in both circumstances was very poor.
Vulgar Keynesianism straight out of ca. 1939.
Professional economists in the U.S. and across the world – don’t even bother listening to them, go home. Its nworth it.
Except here (at George Mason University).
In the Great Depression there were a few good economists.
Warren and Pierson created a price index.
Warren was a nutty economist and got the idea that the way to get out of the depression was to raise prices.
This was the most widely accepted idea in the early ‘30s.
Roosevelt took to the idea.
Warren felt there was a perfect correlation between the price of gold and other goods and wanted to drive the price of gold up. He thought this would lift the country out of the depression.
Roosevelt bought into it.
The Reconstruction Finance Corp. started to buy gold.
They jacked up the price of gold.
The story is told that the Treasury Secretary at that time (Morgenthau) asked Roosevelt how high should we raise the price today?
Roosevelt said, “21 cents.”
Morgenthau asked, “Why?”
“Because that’s a lucky number.”
Roosevelt based his decision on a silly, childish notion.
Hundreds of decisions were made like this.
No one in Washington could know what individuals in local markets did at that time.
Roosevelt just felt that the government had to try something.
It was all blind flailing.
An economy was created by cracked up policies.
It is a miracle the economy recovered at all.
Now we get to give it another try today.
The Federal Reserve system has started to do things in financial and credit markets that were unheard of before.
Student loans, gun loans, etc.
The Fed is undertaking a huge number of programs.
I am trying to find these, and more and more keep popping up every day.
The Fed used to own government securities.
They now purchase all these junk bonds and crappy securities.
Toxic securities – that’s an odd metaphor.
I like to look at political metaphors.
Politicians often try to distort things.
The Fed built up bank reserves twice as much as they held in 2008.
It built this up in just under 5 months. What took a hundred years, the Fed did in under 5 months.
They are still talking about doing more.
The Fed is creating new programs as the lender of first resort.
A lot of people are getting something for nothing from the Fed.
No one knows the value of these securities.
Who could believe that all these M.I.T. PhDs can’t determine how much they’re worth?
They know. They’re simply waiting for the government to bail them out.
The government is offering to bail everyone out.
By the way, did you know the hotels in Washington, D.C. where the lobbyists stay are doing great by the way?
Government policy is usually a decision by fools or charlatans.
Goldman Sachs has come out smelling good for some reason, right?
They’re fools also though, how can they know?
They are trying to substitute their knowledge for the knowledge of markets.
It is a fatal conceit – Hayek was right (i.e. Friedrich A. von Hayek’s The Fatal Conceit: The Errors of Socialism).
It can kill.
It can kill hundreds of millions of people as governments have done before.
As government tries to substitute its knowledge over the knowledge of the market.
Regime Uncertainty is a name given to the years following 1935.
Roosevelt decided to threaten, demagogue, and invite the hatred of the princes of property.
He attacked the entire investment class.
It was a smooth move.
He was reelected by a gigantic margin.
Astute politics.
But what about the economy?
No long term investment was made through WWII?
You may have been caught in fascism if you made an investment.
Where did these people put their money?
When WWII came along the government took control of the economy.
What is happening now has the potential to do the same thing.
The government took over AIG, many of the top banks, etc.
Only Fannie Mae and Freddie and these government-run banks are lending for mortgages.
General Motors and Chrysler – these types of loans to companies can’t be repaid.
That wipes out the existing shareholders by diluting their shares.
The government puts itself into the position to abuse the property rights of citizens.
The government has created a moral hazard.
The Fed Chairman in Philadelphia said the crisis has created a lot of new moral hazard. Once the government intervenes, people will figure out that they can take advantage of the government when it happens again.
There is now downside risk if the government will bail everyone out.
The taxpayers will pick up this risk.
“Privatize the profit and socialize the risk.”
Just rely on your friends in high places.
There is real doubt about the future of our economic system.
I hope a lot of this goes away.
Government leaders keep saying these loans will be repaid.
These loans can’t be repaid.
These are losses to the taxpayers.
These companies are bankrupt.
Bernanke has treated this like a liquidity crisis.
Perfectly good banks were consolidated.
It wasn’t a liquidity crises – it was an insolvency crisis.
The government came along and bought out their buddies.
These companies are the walking dead.
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Tags: Economics, Federal Reserve, Great Depression, Money, Robert Higgs, Ron Paul, WWI, WWII
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