did the FED pump liquidity during the depression?

[Spartacus]

I've read conflicting reports -

some are simply claiming that the FED did not try very hard,

and others claim the FED tried very hard, but banks would not lend and borrowers would not borrow.

I'm leaning toward this latter scenario just because the credit numbers I've seen have always been consistent - people were very slow to start trusting credit again, and talking with people one knows that that generation was extremely distrustful of borrowing.

And this leads naturally to an question for Eric, what specific measures, in which markets (mortgage, bond, stock, commodities, etc ...) could the FED and the government take to ignite inflation if we return to a debt-averse mass psychology?

[Spartacus]

Re: did the FED pump liquidity during the depression?

This is only one side of what I've been thinking.

The other side is in 2 parts,

if you as a consumer are having an EXTREMELY tough time making ends meet and someone offers you a loan that lets you manage, with the understanding that everyone will bend over backward for the next 20 years to ensure lots of these loans do not default, why would you NOT take more debt?

if you are a bank looking at tons of loans going bad, and the FED/Controller tells you you may lend without fear of bankruptcy(this I think might be a key to why the hypothetical depression era pumping did not work - were banks given such assurances?) why would you NOT lend more?

The only fly I see in this ointment is if the FED, Controller and governments only act after the bulk of the damage has already been done, ie, the bulk of the mortgages that would have failed, fail. So the only people being helped would have been people that could have scraped by without the help.

[bart]

Re: did the FED pump liquidity during the depression?

I've read conflicting reports -

some are simply claiming that the FED did not try very hard,

and others claim the FED tried very hard, but banks would not lend and borrowers would not borrow.

I'm leaning toward this latter scenario just because the credit numbers I've seen have always been consistent - people were very slow to start trusting credit again, and talking with people one knows that that generation was extremely distrustful of borrowing.

The Fed guy himself, Ben, admitted that the Fed created it back in a 2002 speech and I agree... but rather than go further into my opinions or any other factual details, I'll just do my chart thing and you can judge for yourself on that portion. Note that the only difference between the two charts is that one has CPI in place of the other's GDP.

[Spartacus]

Re: did the FED pump liquidity during the depression?

OK, so bank credit fell - but was that because the populace as a whole became credit-averse or the banks refused to lend? The disctinction's important, because banks could be legislatively forced to lend, but how to get consumers to take on more credit?

But back to your chart ... the FED did indeed raise the monetary base but the FED was pushing on a string as the banks did not lend(or borrowers never showed up). If Benny has seen this kind of data, how could he conclude that the FED could do the job this time by itself that it failed to do the last time ...

seems your graph means that without some kind of force applied to the banks the FED will be stuck in the same situation.

What's your take on ka-Poom theory, then - if the same dynamic plays out as happened last time the US had the same problem, what's preventing an exact replay?

IMHO it would be different now as the banks would be more willing to lend than before, or could be forced to - but was it the banks that were the problem, or the (lack of) borrowers?

The Fed guy himself, Ben, admitted that the Fed created it back in a 2002 speech and I agree... but rather than go further into my opinions or any other factual details, I'll just do my chart thing and you can judge for yourself on that portion. Note that the only difference between the two charts is that one has CPI in place of the other's GDP.

[bart]

Re: did the FED pump liquidity during the depression?

OK, so bank credit fell - but was that because the populace as a whole became credit-averse or the banks refused to lend? The disctinction's important, because banks could be legislatively forced to lend, but how to get consumers to take on more credit?

But back to your chart ... the FED did indeed raise the monetary base but the FED was pushing on a string as the banks did not lend(or borrowers never showed up). If Benny has seen this kind of data, how could he conclude that the FED could do the job this time by itself that it failed to do the last time ...

seems your graph means that without some kind of force applied to the banks the FED will be stuck in the same situation.

What's your take on ka-Poom theory, then - if the same dynamic plays out as happened last time the US had the same problem, what's preventing an exact replay?

IMHO it would be different now as the banks would be more willing to lend than before, or could be forced to - but was it the banks that were the problem, or the (lack of) borrowers?

In my opinion, KaPoom is generally on target and I agree with it, timing issues notwithstanding.

The simple answer to your question of supply vs. demand is that it was both - banks weren't lending and consumers weren't borrowing.
Much beyond that, and we get into areas where tons of books and doctorates have been written, and that's not including any spin factors.
Do keep in mind as one major point that's different today (among dozens) is that many thousands of banks literally failed and all that liquidity/money disappeared, similar to how money disappeared in the stock market.


As far as Ben and his views and how it could be done, have you read the papers on the Fed site in the area? There are many valid answers there. The biggest real answer I can give though is that what happened in Japan after their stock market crash in 1990 did *not* happen in the US after 2000. The BoJ and Fed operated quite differently, to say the least.


But to answer in broad and address the demand side today; first, the basic culture is one driven by credit so it isn't a stretch or doesn't require a huge change in mind set of the average person for them to respond to more credit issuance or availability. In real estate for example, there's the 50 and 100 year mortgage... and do note I'm not trying to defend it nor am I saying that it's a magic solution, nor is it the only available "tool". Games like that aren't, at best they're stopgaps and tools of the "finance jocks". Wall St. & D.C. & bankster "creativity" is a mainstay of the U.S., and under estimating them is unwise in my opinion.

Again, dealing with the area in broad and avoiding discussion of the "how", let's say a combination of Fed and other actions or lack of actions did make the average guy aware that inflation was truly rising. The normal action to survive and gain from it is more borrowing & speculating, as proven by decades of credit pumping as well as events like Wiemar in the 1920s or Argentina a few years ago. If you research via your favorite search engine and/or library what actually was happening in 1932-33 to cause the recovery, you may find some answers that will help clarify the issues. I also urge you to study what the Fed does and has been doing during and after all recessions since the '50s.

As an aside, currently I believe the Argentinian scenario is much more likely for the "poom" than a Wiemar set of events, but will not exclude a closer to Wiemar outcome.

[jk]

Re: did the FED pump liquidity during the depression?

were there as many mortgage holders in 1930 ready and willing to refinance if rates dropped sufficiently? bernanke has made clear that the fed will target long rates if necessary. drop the 10 year rate and down come mortgage rates. the banks will be kept liquid, and are likely to to be encouraged to maintain lending. anyone who has owned a house more than a few years and hasn't pulled out all their equity quite recently [and so isn't worried about being upside down on the mortgage] will line up for 30 year mortgages fixed at 3 to 4%. i know i will.

[spunky]

Re: did the FED pump liquidity during the depression?

were there as many mortgage holders in 1930 ready and willing to refinance if rates dropped sufficiently? bernanke has made clear that the fed will target long rates if necessary. drop the 10 year rate and down come mortgage rates. the banks will be kept liquid, and are likely to to be encouraged to maintain lending. anyone who has owned a house more than a few years and hasn't pulled out all their equity quite recently [and so isn't worried about being upside down on the mortgage] will line up for 30 year mortgages fixed at 3 to 4%. i know i will.

Sheet my brother . I will be dropping this pupper to a 10 yr note , and have no monthly bills by the time I hit 50 . Sell out and then retire to some other country with my gold stash, and spend the rest of my life drunk at the beach :eek:

[Jim Nickerson]

Re: did the FED pump liquidity during the depression?

Sheet my brother . I will be dropping this pupper to a 10 yr note , and have no monthly bills by the time I hit 50 . Sell out and then retire to some other country with my gold stash, and spend the rest of my life drunk at the beach :eek:

Spunky,

I believe if one finds the Ka-Poom Theory tenable, and if it comes to fruition, then the belief is there will be a period of disinflation (there is worry by some that even deflation may occur). Deflation is bad--people stop spending, prices go down, profits go down, unemployment goes up. During disinflation or if it comes to deflation, interest rates will drop. The Fed is believed to be prepared to fight the deflation ogre by making money easily available so people will spend thus reflating the economy. "Poom" is expected to happen if the Fed is successful with stopping the disinflation or deflation. "Poom" will be highly inflationary. The thinking seems to be that if interest rates drop and one can afford to borrow money, then when rates are low would be the time to do it. Once the inflation resumes and rates go up, then one is "stuck" with a low interest loan which can be paid back with inflated dollars. If one is fortunate to have a locked in low percentage loan rate, then the advantage to pay it back over as long a period as possible in ever inflated dollars/bonars.

A short-term loan such as 10 years on a mortgage would be best in times of higher rates and stable inflation, whereas long-term mortgages at low rates are best during periods of increasing inflation.

The potential problem with being "rich" and drunk on the beach in a foreign country is that someone might kill you, or if you do it long enough your liver might fail.

[Finster]

Re: did the FED pump liquidity during the depression?

Did the FED pump liquidity during the depression?

The Fed pumped liquidity before the Depression.

That's what caused it.

[Spartacus]

Re: did the FED pump liquidity during the depression?

No argument there - the question is, if they tried before to inflate DURING the depression, and failed,

then why do we think they'll succeed with the next fight against deflation, coming soon?

Almost everyone thinks there will be deflation - Mish and Prechter think a lot of deflation, Eric and maybe Puplava and maybe Gary North think a little deflation, and then the FED will be able to inflate.

The Fed pumped liquidity before the Depression.

That's what caused it.

[Finster]

Re: did the FED pump liquidity during the depression?

No argument there - the question is, if they tried before to inflate DURING the depression, and failed,

then why do we think they'll succeed with the next fight against deflation, coming soon?

Almost everyone thinks there will be deflation - Mish and Prechter think a lot of deflation, Eric and maybe Puplava and maybe Gary North think a little deflation, and then the FED will be able to inflate.

You can paper over some of the effects of a deflation of credit with inflation of the money supply. The Fed was hard pressed to do that prior to 1933 because of the gold link. But in the 1970's, that's just what happened. As credit contracted, the Fed pumped up the money supply. The result was that we got our depression anyway, but from a monetary standpoint it was an inflationary one.

What Prechter et al miss is that that's how deflation works when the government is free to expand the money supply. Prices fall anyway, but in gold rather than paper currency. People are impoversished anyway, but via having their money debased rather than having less of it.

[bart]

Re: did the FED pump liquidity during the depression?

...
The Fed was hard pressed to do that prior to 1933 because of the gold link.
...

hmmm... ;)

[Finster]

Re: did the FED pump liquidity during the depression?

hmmm... ;)

...

(... now it's my turn to say, "picky, picky ..." ;))

Yes, but this merely takes us full circle to my original contention that the Fed's pumping of liquidity caused the Great Depression. It was a musical chairs game of the type discussed briefly at http://www.itulip.com/forums/showthr...549&l#post5549. The gold link, inter alia, served to make it painfully obvious how little real there was available to satisfy each claim.

A full discussion of the Great Depression and its causes is beyond the scope of this post, but one of the best analyses ever penned is by Alan Greenspan circa 1966. Yes, the same Alan Greenspan who later headed our beloved Department of Liquidity Pumping. A portion of his screed is reproduced below, although anyone interested in this discussion should read the full text for context.

http://www.321gold.com/fed/greenspan/1966.html

...A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's...

[bart]

Re: did the FED pump liquidity during the depression?

(... now it's my turn to say, "picky, picky ..." ;))

True... and partially, I owed you one. ;)

Yes, but this merely takes us full circle to my original contention that the Fed's pumping of liquidity caused the Great Depression. It was a musical chairs game of the type discussed briefly at http://www.itulip.com/forums/showthr...549&l#post5549. The gold link, inter alia, served to make it painfully obvious how little real there was available to satisfy each claim.

A full discussion of the Great Depression and its causes is beyond the scope of this post, but one of the best analyses ever penned is by Alan Greenspan circa 1966. Yes, the same Alan Greenspan who later headed our beloved Department of Liquidity Pumping. A portion of his screed is reproduced below, although anyone interested in this discussion should read the full text for context.

We did take your contention vs. my contention up a while back, so I won't go into it again other than to note that a deflation does not logically require a preceding inflation, although it almost always does occur like that... and an ipso facto to your inter alia... ;)

My basic point though, is that even before the gold standard was dropped in 1933, the Fed created some major inflation as the chart shows... and regardless of it being legal under a gold standard or not. And as an aside, that's just one of the major problems with a gold standard.

Along similar lines, open market operations were started in the late teens and early '20s in direct contravention of all the laws of the land applying to the Fed. Congress came in around 1926 (again, if memory serves) and made it legal on an ex post facto basis.

[Finster]

Re: did the FED pump liquidity during the depression?

We did take your contention vs. my contention up a while back, so I won't go into it again other than to note that a deflation does not logically require a preceding inflation...

Not so fast, El Bartos ... ;)

No one has shown that a deflation can occur without there having been a prior inflation. The inflation of the 1920s and deflation of the 1930s are a perfect case in point. A ballon or a tire likewise serve as illustrative examples.

Just try deflating a balloon that has not yet been inflated and you will see why you have a heavy burden of proof. Yet we have on record neither a plausible mechanism for such a thing nor a single historical example.

Moreover, even strictly within the purview of economics, it is simply not rational to imagine a deflation without a prior inflation. Modern money, in its most elementary form, is but an IOU for something. For example, someone deposits an ounce of gold or some other property in a warehouse. The warehouse in turn issues a reciept entitling the holder to an ounce of gold or other property. The receipts are traded in the marketplace and comprise an elementary currency. Inflation in this elementary system occurs when the warehouse issues receipts for more gold than are actually on deposit. The intrinsic value of the receipts falls as a result, since each reciept now can only entitle to bearer to a lesser amount of gold.

Musical chairs.

My basic point though, is that even before the gold standard was dropped in 1933, the Fed created some major inflation as the chart shows...

A point which I have not taken issue with. Again, I already stated that the Fed's prior inflation caused the Great Depression.

Even Alan Greenspan agrees with me. :eek: