Paul Krugman: Partying Like It's 1929

New York Times:

If Ben Bernanke manages to save the financial system from collapse, he will -- rightly -- be praised for his heroic efforts.

But what we should be asking is: How did we get here?

Read the whole story: New York Times

Comments

[mmckinl]

03:14 PM on 03/23/2008

A Brief History of the Privately owned and operated Federal Reserve ...

And what has happened since the privately owned and operated Federal reserve was established in 1913 ?

-1914 - 1920 easy money inflation ... 1921 Severe Crash

-1922 -1929 leveraged easy money inflation ........... Great Depression 1929-1940 .... 1933 Gold bullion confiscated ...

- Massive borrowing for war - Fed appeased 1940-1962

- 1963-1970 WWII debt paid, Fed not happy ... Kennedy tries Silver ... Viet Nam ramps up government spending ...

- 1971-1979 Nixon goes off gold, The Fed allows inflaion to reach 20%

- 1980 - 1986 Volcker raises interest rates to 20% to stem the tide of the previous Fed incompetence. Economy dives ... Reagan spending goes crazy,, biggest non war deficits ever.

- 1987 Greenspan causes stock market drop and lays seeds for the S&L Crisis and the bond crisis.

- 1989-1991 S&L and bond market crisis due to deregulation ...

- 1991 - 1997 further deregulation even though Congress has asked the Fed, Greenspan to regulate loan underwriting ... Greenspan does nothing begins inflating again ...

- 1998 - 1999 LTCM crisis due to leverage and derivatives leads to Asian crisis and Russian default ... The Fed inflates more, deregulates more, ,stocks go hyper bolic.

- 2000-2003 Stock Market Crash, more Fed deregulation, Fed endorses tax cuts, lowers interest rates to 1%. Iraq War funding and Tax Cuts send budget and debt hyperbolic.

- 2004-2006 Fed endorses exotic loans, refuses to regulate loan underwriting ... Derivatives markets become trillion dollar markets for the banks , the Fed declines to regulate or even offer a framework.

- 2007 Real Estate crash begins, Fed says everything is fine ....

Thomas Jefferson

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

[WMG]

06:49 PM on 03/23/2008

Thomas Jefferson was brilliant and his view on currency was absolutely correct. Your post provides a reasonable review of Fed mistakes over the last nearly 100 years. We need to abolish the Fed, end fractional reserve banking, and return to gold/commodity based currency.

Citizens should read/learn everything they can about the Fed. Turn off bubble vision and read books and the web instead. Rothbard's "The case against the Fed" is a good place to start. Learn about and understand money; our lives and society depend on it. Money interests worked for 2 decades to pass the Federal Reserve Act in 1913. And they accomplished it in W. Wilson's administration.

Andrew Jackson, founder of the modern Democratic Party, was a Sound-Currency advocate. He viewed one of his greatest achievements to be the dismantling of the Federal Bank in place during his administration. This fight has been waged for centuries. It is about power and freedom. It impacts everything, from wealth distribution, to investment/mal investment, to war, and the environment. Learn about money and fight for your country and yourselves. Stop presuming that this system works without your informed involvement.

[mmckinl]

07:23 PM on 03/23/2008

Returning to a gold standard is not the answer. Giving the power to a Public Central Bank to create crrency is.

In having a Public Central Bank create the currency we can eliminate debt based leveraged banking altogether. Now, with the computer and the internet the Public Central Bank can be the originator of credit ! Just require all banks to loan at a 1 to 1 ratio of deposits to loans.

If the banks need money they can borrow from the Public Central Bank at interest. Now they have to pay a real interest rate to depositors, a rate higher than inflation ! We would reward frugality instead of punishing it with inflation !

[PNG]

07:55 PM on 03/23/2008

mmckinl

Thank You Very Much

[jackpinesavage]

09:09 AM on 03/23/2008

I note that Mr. Krugman, Clinton champion that he is, neglected to mention that the foundation for our current situation (which he describes wonderfully) was laid by the repeal of Glass-Steagall under Bill. Nor does he mention that Glass-Steagall was enacted to keep the shady behavior of banks in the 20's from repeating itself.

Learning from history is not so much about what you get out of it as it is what you leave out of it.

[Mike169]

10:45 AM on 03/24/2008

Someday the people of this country will open their eyes and realize that we have but one party in this country - the "capitalist" party. That party has two wings - Democratic and Republican. Both wings seem to be in the pockets of business to the detriment of those of us who need protection from business. Until we realize this we may as well be battering our heads on a wall - which is really what's happening politically today. The odd thing about the "capitalist" party is that it not really "capitalist" but socialism for the rich - the irony is too much!

[PKSSK]

03:53 PM on 03/24/2008

You are correct jackinesavage. Glass-Steagall was repealed during the Clinton administrations with the help and support of Greenspan and Rubin who went on to establish the Financial Services Modernization Act, which eliminated all banking regulation and is the major contributor to the catastrophic events of today.

[bushmocker]

08:06 AM on 03/23/2008

We need regulation to return to almost every facet of American life,be it financial,environmental,transportation,voting.........etc.The need for harsh penalties is even more important.If someone sticks me up with a gun and takes my money it doesn't affect my financial future much further than a week to a month.That criminal act could possibly get the guy 20 years in prison depending on circumstances and the laws in place where the crime occurred.Somehow in a our zeal to punish the criminal we have decided to throw the book at him.Yet when a respected businessman is allowed to reduce thousands of peoples assets to nothing affecting not only their clients futures but their families too, it's looked upon as"white collar crime" .That includes children unable to attend college,healthcare gone,entertainment gone,home gone,all around poverty.These "white collar criminals" are slapped on the wrist with a fine or at worst contact their political cronies and spend time in a country club prison for a short period of time.They have to suffer the agony of dinner w/o fine wine(or maybe not).In all honesty if one man is responsible for bringing misery to so many people and directly or indirectly causing the deaths of many of his/her clients, shouldn't there be a possible life sentence or even death penalty in play?.These criminals are well educated and they are the ones that a stiff penalty would deter the most.Deterence would be built into their psyche if they saw harsh penalties and complete financial ruin come to the families of "white collar criminals".Shouldn't their family have to pay the same burden as a retired couple left penniless?Shouldn't real shame be brought to bear on these swindlers instead of a 12 step program and book deals.

[loki]

11:17 PM on 03/22/2008

I think the difference between 29 and today is that in 29, the gov didnt take taxpayer money and shower failing companies with it, rewarding them for all their mistakes and greed that helped drive the economy into the ground. Also, the same type of people who in 29 felt guilt over their mistakes, some to the point of diving out windows or committing other forms of suicide are not found in todays Wall Street environment. There is no guilt for CEOs and upper management in todays failing companies. Nowadays these people make millions , if not billions in bonuses while the ships they captain sink faster than the Titanic, but are quickly floated to the surface with taxpayer money . Nope, Bernie will not fix this. Tax payer money might slow it, even stall it for a little while, but even that will run out sooner or later, and that is what this is all about isnt it? Run the Gov and the country into Reagans glorious economical Train Wreck so we have no choice but to give up all NON-corporate social programs and create an entire country of poor people in debt and willing to work for the lowest wages to keep from losing what little they have , thanks to the Bush Bankruptcy laws.

[BPCentrisAmerican]

08:56 PM on 03/22/2008

Milton Friedman and Ronald Regan are dead; let their obsolete supply side, top down economic theories die with them. David Stockman in an interview with Tom Brokaw during the Regan funeral said and I quote, “supply side, was a failure because President Regan blew up the deficit”. Milton Friedman came of age and was embraced as an economist just prior to Great Depression, and I would argue that his economic theories in large part lead us into it, at least in the United States. The stock market crash of 1929 was caused by the efforts of Hubert Hoover trying the to cool down the economy way to fast.

[mmckinl]

07:44 PM on 03/22/2008

We need a Public Central Bank. A bank that will not charge us interest on our own money. A bank that will honor its fiduciary duty to the public. A bank that will truly be independent of the interests it regulates.

The privately owned and operated Federal Reserve has throughout its ninety-five-year history promoted the interests of its members over the good of the country. Over the last twenty years we saw bubble after bubble, panic after panic, each more serious than its' predecessor and yet the mantra was always "free markets," "less regulation" and more "financial innovation." And for what? The profits of their member banks who own all the shares of the corporation known as the Federal Reserve.

This crisis is far from over, and in the meantime the public is subsidizing the very interests that caused the disaster. The problem is that there are much bigger catastrophes looming. Tens of trillions of dollars of Credit Default Swaps and hundreds of trillions of dollars in derivatives that are in a market that is not regulated and has no financial standards for counterparties and no legal framework for determinations. Our entire gross domestic product is only about 14 trillion. The loss of even a small percentage of these markets will bankrupt the country. The failure of the Federal Reserve to regulate these behemouth markets is in itself reason enough to give them the boot.

We need a Public Central Bank that will act in the interest of the country, a fiduciary duty that has always taken a back seat in the privately owned and operated Federal Reserve.

[WIpatriot]

09:23 PM on 03/22/2008

I believe the Fed has shown its true colors.

[olephart]

07:00 PM on 03/22/2008

One of the primary contentions of Friedman was that Markets regulate themselves. As a casual observer of the ongoing financial commotion I couldn't help but notice the truth to this statement. Indeed the Markets, those who buy and sell financial instruments, were in the process of this "Self Regulation". The sellers had fraudulently passed off trillions of dollars in junk bonds as AAA paper. They had billions more on their books and in their managed funds. When the true nature of these highly denominated rolls of toilet paper became known last Summer and Fall, the Market rightly revalued them to nothing. This presented a problem to the criminal entities we all know and love as the Wall Street Brokerage Houses. The Market, in its infinite wisdom, did its job and was effectively puting these Racketeers out of business.

The Federal Reserve and the Treasury Department seeing that the Market was functioning set about injecting Socialism into the system. This was accomplished by first making money cheaper to borrow then loaning billions to the corrupt institutions. When the Market refused to roll over the Fed did what it had never done before, it took the worthless junk bonds that the Market had refused to buy as collateral for taxpayer dollars. When investors voted with their feet to flee one of the Houses of Ill Repute, the Fed agreed to buy outright billions of worthless paper with taxpayers dollars.

Thus when the Market that Free Enterprise lauds dared to rear its ugly head it was decapitated by Socialism in the name of Free Enterprise. Now as a homework assignment, lets all reread our Milton and find the chapter where he claims sweatshops are good.

[WIpatriot]

09:22 PM on 03/22/2008

[Bright checkmark] HuffPo pick! Well. it would be if I were in charge.

[Rog49Thomas]

12:31 AM on 03/23/2008

No.

The Fed rushed in belatedly to prevent a meltdown in the financial sector and a replay of 1930.

The financial sector is the one where the domino theory actually holds.

[olephart]

09:27 AM on 03/23/2008

No, in 1930 Commercial banks failed and their depositors lost their money causing in large measure the Depression. The Brokerage Houses are different entities. Your local bank is for the most part not involved with the criminal activities on Wall Street. Small depositors at the Brokerage House are insured, if they were smart, by the FDIC. Other insurance against loss of securities is provided by the SIPC. Just as the loss of a retailer at the Mall will not cause widespread panic in shoppers, neither would the loss of Brokerage Houses run by criminals cause a vacuum that would not immediately be filled by a better run competitor.

[guntotinganglion]

05:02 PM on 03/22/2008

It is 1929, and George W. Bush is Warren G. Harding, Calvin Coolidge and Herbert Hoover on steroids...with alcoholism induced brain damage!

[JimSAC]

04:50 PM on 03/22/2008

I hope that the failing economy turns out to be a bigger issue than the candidate's pastors. Given that the falling dollar, the slowing economy and increases in inflation are all related to money borrowed to fight the war it would be reasonable to choose a different party th run the White House. However, this may turn out to be less important the pastor problem.

[Rog49Thomas]

02:35 AM on 03/23/2008

What about the more critical issues that face the common man in our country?

Flag burning

Illegal aliens

Abortions

And imagine your horror when illegal aliens burn flags on the way to the abortion clinic.

Or did I mention that some of them are definitely gay and they want to get married.

And you're worried about the economy?.

[BillZBubb]

04:45 PM on 03/22/2008

Once again, Krugman nails it. He correctly predicted this current situation several years back. He put the blame squarely where it belonged: on Republican policies and governance.

[Photofarm]

06:37 PM on 03/22/2008

Wrong, the problem is squarely on the people themselves, that won't educate themselves to not be taken advantage of by those promising too good a deal. Regulations try and correct the last problem, but seldom see the next one occurring. People replaced the Stock Market dot com bubble of the Clinton years with the housing bubble of George W. Bush. Political hucksters blame the other party, when if people just got educated and looked out for themselves, believing that the government can't save them from all wrong, they would be better off.

[TakeSake]

06:49 PM on 03/22/2008

Hey! I have some really good vitamins. They solve most health problems if you take them long enough. The price isn't bad - only about 10 cents per pill. Now, they way they work is really complicated, and it takes a professional to explain it - and even then, most wouldn't understand, so you would need to talk to the Ph. D's who came up with them. But they say it works! What do you say? Come on, you know that trouble that's been bothering you for 10 years? Gone! All you need to do is make the commitment!

[BillZBubb]

08:17 PM on 03/22/2008

That is too funny. You want to compare the dot com bubble with the mortgage and credit meltdown? If so, you don't know much about economics. In as much as the dot com stocks were not being bid up on borrowed money--and for the most part they were not DUE TO TRADING RESTRICTIONS--they posed no fatal threat or serious long term damage to the economy. The people who risked their money rightly suffered their losses. The government regulations kept that bubble from being a major problem.

Credit bubbles, on the other hand are an entirely different problem. The Republican/conservatives failed, even after ample warning, to put regulations in place to limit the use of dangerous mortgage practices. They failed to regulate the derivatives based on those mortgages. This was not a "next one" issue, these credit fiascoes happened under other Republican administrations--particularly that of Herbert Hoover. Economists know how to deal with them--but the right wing fanatics don't want government "interference"--until they need a bailout.

Your rather naive and elitist view that the people are uneducated and look to the government to protect them from "all wrong" is pathetic. There will always be a way for hucksters to dupe people into accepting a rosy scenario--just like right wingers suckeres always buy into the "supply side" free lunch nonsense. Throughout time that has been true, your naive wish not-withstanding.

The government must limit the damage that can be done to the whole economy by financial practices. This isn't a matter of saving individuals from their own bad decisions or from the fraud perpetrated on them, but of saving all of us from the outcome.

[Rog49Thomas]

04:41 PM on 03/22/2008

There seems to be more than the usual HuffPo confusion about this issue..

First, the repeal of Glass Steagal has little if anything to do with this crisis. Before Glass Steagal was repealed commercial banks could originate mortgages, did so, and sold them off to the Fannie May and Freddie Mac. There was be nothing to prevent them from originating mortgages and handing them off the investment “banks” to package into CDOs and other securities. And this was done before the recent subprime folly.

Dspite being called “investment banks”, Bear Stearns, Lehman, Merrill Lynch, et al are not banks. They do not have banking licenses and are not regulated by the Fed, the FDIC or Comptroller of the Currency. These firms largely packaged and sold the subprime CDO products. And were free to do so before G-S was repealed.

All that the repeal of Glass Steagal means was that some of the commercial banks could get involved in this business. But even if G-S were still in place, the subprime crisis could have taken place and probably would have just the same.

The root cause was a profound failure by our regulators.. It doesn't take someone as smart as President Pan (and I am deliberately setting the bar fairly low) to recognize that subprime lending was recklessly dangerous and that the securities being created were grossly over valued. In an earlier time, the Fed would have called the market players and told them to cool it. In the late 70's when the Hunt Brothers were trying to corner the silver market, Paul Volker publicly stated that big banks should rein in commodities lending. They did. This coupled with some timely changes in exchange rules (hand of the Fed this time behind the curtain)squeezed the Hunts.

Fast forward to our own times. The Fed did not intervene to stop subprime lending because of a delusional belief (despite abundant evidence to the contrary) that markets self regulate and that government regulation is bad. And you might guess precisely who is the most delusional party and administration on this point.

Second, the creation of the Federal Reserve is not a plot by British interests or shadowy “Bilderbergers” to control our economy.. And, no, the Queen of England is not dealing crack cocaine in your or my neighborhood.

The Fed was a political compromise arising from long standing opposition in this country to a central bank “controlled by presumably evil East coast plutocrats”. It came out of a financial crisis in 1907 - where it became clear that the USA needed a govt entity to manage financial crises and could not rely on J Pierrepont Morgan or some other banker to manage rescue efforts.

And, If you look around the world, you'll quickly sees that monetary authorities are not infallible – there have been financial crises in just about every country in the world. Those with central banks, monetary authorities, etc. From the presumably sober nations of Scandinavia, and England to the more wild and woolly ones. So it's not some great conspiracy. It's a combination of good old human fallibility, economic "religion", greed, etc.

Third, the gold standard is not a universal cure all. Unfortunately, there are no magic solutions in life: what works well in one situation does not work well in another.

The major problem with the gold standard is that it is deflationary in an expanding economy because the supply of gold is relatively fixed and generally doesn't grow as fast as the economy. One prime example: the US's resumption of the gold standard after the Civil War led to profound economic misery (particularly for farmers) and to a populist "revolt" And of course if the supply of gold or the monetary base metal suddenly increases, there is tremendous inflation (Spain after mining successes in its New World colonies)..

This deficiency in the gold standard is why monetarists like Milton Friedman who believe that monetary policy is the prime driver of the economy don't embrace the gold standard..

[satyriasis]

04:57 PM on 03/22/2008

great post, Rog

[naturallight]

05:09 PM on 03/22/2008

ok.





So what are the 'bildeburgers' up to ?

[Rog49Thomas]

01:25 AM on 03/23/2008

According to some, they are out to create a one world government which will enslave the common man to the big money godless interests of capital.

"Serious" "thinkers" disagree whether or not they will mark you with "666" or implant a thought control chip in your brain.

And, no, tin foil hats are definitely not going to work.

You can defend yourself by making the following preparations:

(1) Purchase a Bible and one or more works by von Mises and Hayek

(2) Join the NRA and purchase as many guns as you can

(3) Stock up on gold and diamonds But very important to keep these secure. Safe deposit boxes (run by the evil banking interests in thrall to the Bilderbergers are not safe. You should sew the diamonds and gold into your clothes. My own personal experience is that it's best to put the gold into your shoes.

(4) Prepare that "bolt hole" to flee to when the collapse of civilization occurs or the Bilderbergers formally take power. Make sure it's well stocked with long life food.

(5) Also make sure you have ample supplies of Risperdol, Clozaril, and Geodon.

[Rog49Thomas]

03:35 AM on 03/23/2008

Naturallight

Well, since no one has caught on - I thought the HuffPo was the place for "serious" conspiracy theorists,

(1) The BIlderberg Group was founded in 1954

(2) The Trilateral Commission in 1973

So for the Federal Reserve "conspiracy" the flavor of the day was the House of Rotschild and British interests.

If you have an old copy of the "Dearborn Independent" you could I suppose get the "straight dope" or some form of "dope".

[njdon]

04:40 PM on 03/22/2008

there is no war against the economic terrorists. roundup the suspects.

no, i will not suggest who they might be. just sayin'.

[cognate]

04:27 PM on 03/22/2008

Party like there's no tomorrow.

[BigBagel]

04:41 PM on 03/22/2008

Party like your Elliott Spitzer.

[naturallight]

05:29 PM on 03/22/2008

Actually Elliot tried to fight this. Check it out.



http://www.youtube.com/watch?v=GMo7T9t0Gzk

[Sundialsvc4]

04:01 PM on 03/22/2008

Basically, if these government cats were to be believed (i.e. believable), they're saying that they've latched onto a magic money-machine that would make King Midas envious. But all they're really doing is printing money (via computer, nowadays) without creating true value. Without -making- anything. Which, especially for a nation of more than 320 million people, isn't possible.

Like the 1929ers, they've confused cash with money. You can print cash; these days you can just punch a transaction into a computer and "you've got cash!" But do you, really? No.

What I want to see step forward is a group of government leaders, backed by real entrepreneurs, who understand that "America is still here." It's been asleep for about 50 years but that's not a long time. We don't need "we sell for less" when we can create within our borders "we sell the best." And because we're now the ones making it: "Lo! We can afford it, too!"

Money is only a symbol; only a unit of trade. "Wealth" that consists "merely" of money is nothing more than leprechaun gold. Which is =absurd= for, of all countries, this one.

[WIpatriot]

10:36 AM on 03/24/2008

Key word: Value. Right on, Sundial.

[scoobynooby]

03:47 PM on 03/22/2008

There will be no correcting this situation since its a deliberate situation caused by the fed and banks/bilderbergs that want a new raw deal which will come in the form of North American Union and a new currency called the amero. It's time to disolve the fed and for citizens to pony up its gold once again and go back to a real currency backed by gold and silver. It's the only way to recover and keep or republic as it was intended by the founding fathers with liberty and justice for ALL and real freedom without survelance. "and that s all I have to say about that"