Replay of Great Depression unlikely

[olivegreen]

What do you learned folks think of this? Would appreciate thoughts...

http://www.cbc.ca/money/story/2008/0...-forecast.html

OG

Replay of Great Depression unlikely, TD bank says
Central bankers avoiding errors of 1920s and 1930s, economists claim
Last Updated: Thursday, September 25, 2008 | 12:08 PM ET Comments17Recommend19
CBC News

Is the United States about to revisit the Dirty Thirties and take the rest of us along for the ride?

Probably not, say economists at the Toronto Dominion Bank.

They argue that the Federal Reserve Board, the U.S. central bank, is avoiding mistakes it made before the big crash of 1929 and during the long economic darkness that followed.

"Some draw parallels between the current situation and the Great Depression," the bank's economics department said in a quarterly economic forecast issued Thursday, dismissing such comparisons as "a stretch."

The TD economists list three major Fed blunders of the 1920s and 1930s:
• "First, the onset of the Great Depression owed to a tightening of monetary policy. The Fed raised rates in 1928 to stem what they deemed excessive speculation fuelling a stock market bubble."
• "Second, the Fed of the early 1930s abdicated its lender-of-last-resort responsibility, allowing widespread failure of banks and undermining confidence in the system."
• "Third, at the onset of the contraction in the Great Depression, the Fed failed to maintain price stability, inducing deflation."

In contrast, the modern Fed strives to keep prices from rising or falling dramatically and has unquestionably pursued a financial loosening over the past year, lending aggressively and finding new ways to channel cash to shaky institutions, the economists say.

"Central banks around the world have learned from the mistakes of the Great Depression, which is why we’re seeing more aggressive and coordinated efforts around the world to ensure the global financial system has access to sufficient funds to weather the crisis," they say.

The economists argue that the current mess — which follows a mortgage lending binge, a tidal wave of defaults and a collapse of house prices — is more like the U.S. savings and loan crisis of the 1980s, only worse.

The S&L crisis was smaller and lacked the international reach of today’s financial crisis, they say.

"During the S&L crisis, the government established a Resolution Trust Corporation at just over $400 billion. The purpose was to purchase the bad debts of financial institutions and over time sell them back into the market as financial conditions improved. The RTC was able to sell over 95 per cent of the assets they had initially seized with a recovery rate of over 85 per cent. That left the taxpayer ultimately footing a bill of $124 billion, while corporations absorbed $29 billion in losses.

"The current financial crisis is carrying a bigger price tag. Corporate write-downs and losses have already mounted to over $500 billion, with about half of that being borne by non-American firms ... The total public and private tally will greatly exceed that of the S&L crisis.

"While this may seem daunting, at this stage in the cycle, it is more important to head off a more painful, deep and extended economic downturn by enacting measures that can quickly restore market confidence and financial market operations in order to prevent a complete freezing up of credit supply."

In its forecast, TD predicts a mild world recession next year and little economic growth in Canada or the United States.

"Notably, while not crashing American style, Canadian real estate has come off the boil," TD says. "It is almost inconceivable that painful adjustments in our manufacturing sector have been completed. In all, these factors lead us to a profile for the Canadian economy that resembles the American. Essentially, more sideways movement on output with only a shallow recovery in late 2009."

[D-Mack]

Re: Replay of Great Depression unlikely

Well, some compare it to 1923 Germany, and I'm not learned......

[grapejelly]

Re: Replay of Great Depression unlikely

it's a pathetic analysis. The Great Depression happened before, in 1921, but it was allowed to burn itself out, and things moved along.

The same contraction happened in 1929, and the gubmint moved in to "do something" and this is what resulted. Employment levels never rose beyond those in the early Thirties and if the war hadn't been responsible for wholesale slaughter, the depression would have continued.

The programs that resulted in a big contraction becoming a Depression centered on Roosevelt's trying to raise prices. Raise prices of everything. Without that, prices would have been allowed to fall, and the actors would have adjusted with natural creative destruction, and then rebuilt. But with all the interventions, there was less of everything to go around and a declining living standard for the middle class.

The US government right now is trying to keep prices high. Trying to keep asset prices high. What is the difference between what it is doing now and the 1930s?

Some ascribe Smoot Hawley to the Great Depression but I don't think this was more than ancillary. From my readings, it was Roosevelt's New Deal programs that caused it. It was the cure that caused the disease.

Roosevelt blamed evil Wall Street types and speculators and all of that. But he was an economic idiot. He saw very low commodity prices, and falling labor prices, and he assumed a quack theory that said if you raise those prices, everyone will be better off.

The present "bail out" is based on the same quack theory and will probably have the same results.

[D-Mack]

Re: Replay of Great Depression unlikely

it's a pathetic analysis. The Great Depression happened before, in 1921, but it was allowed to burn itself out, and things moved along.

The same contraction happened in 1929, and the gubmint moved in to "do something" and this is what resulted. Employment levels never rose beyond those in the early Thirties and if the war hadn't been responsible for wholesale slaughter, the depression would have continued.

The programs that resulted in a big contraction becoming a Depression centered on Roosevelt's trying to raise prices. Raise prices of everything. Without that, prices would have been allowed to fall, and the actors would have adjusted with natural creative destruction, and then rebuilt. But with all the interventions, there was less of everything to go around and a declining living standard for the middle class.

The US government right now is trying to keep prices high. Trying to keep asset prices high. What is the difference between what it is doing now and the 1930s?

Some ascribe Smoot Hawley to the Great Depression but I don't think this was more than ancillary. From my readings, it was Roosevelt's New Deal programs that caused it. It was the cure that caused the disease.

Roosevelt blamed evil Wall Street types and speculators and all of that. But he was an economic idiot. He saw very low commodity prices, and falling labor prices, and he assumed a quack theory that said if you raise those prices, everyone will be better off.

The present "bail out" is based on the same quack theory and will probably have the same results.

I haven't read enough on this topic but the raising prices baffles me.

Engdahl writes about it in a negative way

The AAA and collective farming efforts

Little wonder that businessmen who read such quotes from a member of FDR's inner circle, became alarmed. All the more so, when a spineless Congress in the first Hundred Days rubber-stamped major new legislation, including the creation of the National Industrial Recovery Act (NIRA), and the Agriculture Adjustment Act (AAA), both laws victories for the Tugwell-Stuart Chase-A.A. Berle central planning faction within FDR's inner circle.

The AAA and NIRA, both of which were struck down later by the Supreme Court as unconstitutional, were the high-point of the direct influence of the national planners around Tugwell, Stuart Chase and A.A. Berle.

The Agriculture Adjustment Act was passed in the First Hundred Days by Congress in May 1933. It was the work of Tugwell and Henry Wallace, with the legislative draft language corrected by Felix Frankfurter, who played a central role in leglslative language of all major New Deal bills.

American farming had been in trouble since the end of World War I, and had never readjusted during the 1920's to the recovery of European agriculture and their imposition of protective tariffs. Farm debt per capita was alarmingly high coming into the depression. The AAA took a bad situation and made it worse in terms of distorting long-term market change, and creating a massive, absurd state intervention structure for the first time outside of war, into the nation's production of food and textiles. Indeed, the present distortions of USDA agriculture subsidies and the attendant bureaucratic leviathan of field agents, payments for set-aside and such trace back to the precedent set under the AAA.

At the time when millions of Americans were hungry and ill-clothed during the depth of the depression, the AAA ordered farmers to destroy crops and to kill livestock. The goal of the Tugwell AAA was simply, to "raise farm prices." The problem that was ignored, is that someone must pay the rising food and crop costs. And in a depression, who should that be? The millions of unemployed?

In order to raise prices fast, Wallace ordered 10 million acres of cotton crop to be plowed under and destroyed in August 1933, followed by the killing of 6 million pigs, including the reproductive potential of sows and small pigs, to meet the demand of farmers for 1914 levels of "purchasing power parity." Ironically, under AAA, the pigs were turned into fertilizer which went to raise output on remaining farms even more.

The farm surplus crisis was further aggravated by FDR's high-handed decision to torpedo a summer 1933 international monetary conference in London, opting instead for a national course, leaving European governments little choice but to counter USA import tariffs with their own, further limiting US exports of agriculture products, adding to the relative glut.

Farmers who agreed not to plant specific crops were given direct payment not to grow. The payments for not growing were financed from a tax on food processors—slaughter houses, grain mills and such . In turn consumers were forced to cover the tax cost through higher prices. The Secretary of Agriculture further was given exclusive powers to license food processors in order to control supply and raise prices.

The AAA was declared unconstitutional in January 1936 by the Supreme Court. That came after two years of the worst drought in history, especially in 1934, reduced crops far more than any AAA. In the period 1934-1936, from the Appalachians to the Rocky Mountains drought destroyed between 20% and 33% of major crops. Not surprisingly, such drought cut supply and led to rising prices, something the AAA opportunistically took the credit for.

The impact of the AAA was particularly savage in the Southern tenant or sharecropping farming, where AAA subsidies were paid to the owner, not the tenant farmers, resulting in major devastation of income and jobs of tenants and mass unemployment in face of nationwide depression. As a result, some 32 million Americans struggled to eke out subsistence many on marginal farms when perhaps 26 million would have been realistic. Millions of families were kept in semi-feudal status through the hopes engendered through AAA and its successor.

The very concept of the AAA was counter to the long-term economic process of creating lower price food to a growing urban labor force. After its provisions for taxing processors were ruled unconstitutional in 1936, a month later FDR's team had drafted and passed in Congress, amid great populist pro-farm fanfare, the reworked Soil Conservation and Domestic Allotment Act of 1936, maintaining the same essential intervention policy with other words. By 1938 the Federal government held more direct control over the nation's farming than ever before. And direct control, rather than mere restriction was the defining aspect of the AAA and Wallace-Tugwell New Deal agriculture.

http://www.engdahl.oilgeopolitics.ne.../new_deal.html

There seems to be a difference between Roosevelt's usage of the RFC and Hoover's who created it.

It looks like Hoover wanted to prop up paper value, essentialy what we have now with Bush

Revive the Reconstruction Finance Corporation

...

To begin to answer these questions, we should consider the experience of Franklin Delano Roosevelt's New Deal. Contrary to what some believe, FDR did not originate one of the most important institutions of the New Deal, the Reconstruction Finance Corporation. The RFC was created in 1932 during the administration of Republican Herbert Hoover. The crucial point of difference, however, is how the two presidents used the RFC.

For Hoover, the RFC was used to "restore investor confidence." Before FDR reformed it, the RFC lent money to banks and, to a much lesser extent, railroads. These private institutions did not use the money to invest in new plant and equipment or put the unemployed to work. This money was used to shore up balance sheets and prevent the further deterioration in the value of stocks and bonds already issued, and loans already made, by these institutions. Thus, if the RFC served any purpose at all it essentially bailed out investors. Its lending was essentially sterile; no new assets were created and nobody was put back to work.

During FDR's famous "hundred days", the RFC's authorization for borrowing from the Treasury was increased dramatically, and it was given vast new powers. Under Roosevelt, the RFC quickly became the nerve center for the most creative aspects of the New Deal. Led by banker Jesse H. Jones and lawyer, Thomas G. "Tommy the Cork" Corcoran (a protégé of Felix Frankfurter), the RFC helped finance a major infrastructure program, capitalizing the Tennessee Valley Authority, funding dam and waterway projects in the West, and underwriting the building of government assets through the Works Progress Administration and the Public Works Administration. It funded the government's de-monetization of gold (an important plank in the New Deal's effort to combat deflation) and served as the chief means of reorganizing the banks. It provided crucial financial support for rural electrification efforts. The RFC founded Fannie Mae as the centerpiece of its policy of spreading home ownership through government-insured mortgages. In the 1940's, the RFC played a central role in financing the industrial expansion necessary to support the war effort.

..
http://www.pjvoice.com/v11/11002budget.html

[grapejelly]

Re: Replay of Great Depression unlikely

IMHO, the US government is going down the exact same path as Roosevelt did. The same result may or may not happen, but the path seems the same.

Roosevelt inflated. Pure and simple. He did so by suspending conversion of the US dollar into gold, confiscating gold, devaluing the dollar directly in terms of gold, and increasing federal spending.

What is so different about what they are doing today? Not much.

[rabot10]

Re: Replay of Great Depression unlikely

IMHO, the US government is going down the exact same path as Roosevelt did. The same result may or may not happen, but the path seems the same.

Roosevelt inflated. Pure and simple. He did so by suspending conversion of the US dollar into gold, confiscating gold, devaluing the dollar directly in terms of gold, and increasing federal spending.

What is so different about what they are doing today? Not much.

Almost 10 trillion of debt - any other questions?

[metalman]

Re: Replay of Great Depression unlikely

Almost 10 trillion of debt - any other questions?

not like this, like this...

Net creditor at the zero bound: US 1927 - 1937
Currency strengthens, capital flows in, deflation dynamics set in

Net creditors like the US in the 1930s and Japan in the 1990s became recipients of global flight capital in a global financial and economic crisis; the currencies of net creditors appreciate relative to their trade partners’ as a result. As a percentage of GNP, the US is now a major net debtor. It is therefor vulnerable to the effects of a reversal in capital flows.

Like this:

Net debtor at the zero bound: Argentina 1995 - 2008
Currency weakens, capital flees, inflation spikes

Why the Fed can’t lower rates September 16, 2008, iTulip

Wondering why the Lehman failure and yesterday’s 500 point DOW drop didn’t move the Fed? Short term, a cut won’t help. Long term, cuts shrink an already very short runway to zero bound hell.

[GRG55]

Re: Replay of Great Depression unlikely

What do you learned folks think of this? Would appreciate thoughts...

http://www.cbc.ca/money/story/2008/0...-forecast.html

OG

Replay of Great Depression unlikely, TD bank says
Central bankers avoiding errors of 1920s and 1930s, economists claim
Last Updated: Thursday, September 25, 2008 | 12:08 PM ET Comments17Recommend19
CBC News

Is the United States about to revisit the Dirty Thirties and take the rest of us along for the ride?

Probably not, say economists at the Toronto Dominion Bank.

They argue that the Federal Reserve Board, the U.S. central bank, is avoiding mistakes it made before the big crash of 1929 and during the long economic darkness that followed.

"Some draw parallels between the current situation and the Great Depression," the bank's economics department said in a quarterly economic forecast issued Thursday, dismissing such comparisons as "a stretch."

The TD economists list three major Fed blunders of the 1920s and 1930s:
• "First, the onset of the Great Depression owed to a tightening of monetary policy. The Fed raised rates in 1928 to stem what they deemed excessive speculation fuelling a stock market bubble."
• "Second, the Fed of the early 1930s abdicated its lender-of-last-resort responsibility, allowing widespread failure of banks and undermining confidence in the system."
• "Third, at the onset of the contraction in the Great Depression, the Fed failed to maintain price stability, inducing deflation."

In contrast, the modern Fed strives to keep prices from rising or falling dramatically and has unquestionably pursued a financial loosening over the past year, lending aggressively and finding new ways to channel cash to shaky institutions, the economists say.

"Central banks around the world have learned from the mistakes of the Great Depression, which is why we’re seeing more aggressive and coordinated efforts around the world to ensure the global financial system has access to sufficient funds to weather the crisis," they say.

The economists argue that the current mess — which follows a mortgage lending binge, a tidal wave of defaults and a collapse of house prices — is more like the U.S. savings and loan crisis of the 1980s, only worse.

The S&L crisis was smaller and lacked the international reach of today’s financial crisis, they say.

"During the S&L crisis, the government established a Resolution Trust Corporation at just over $400 billion. The purpose was to purchase the bad debts of financial institutions and over time sell them back into the market as financial conditions improved. The RTC was able to sell over 95 per cent of the assets they had initially seized with a recovery rate of over 85 per cent. That left the taxpayer ultimately footing a bill of $124 billion, while corporations absorbed $29 billion in losses.

"The current financial crisis is carrying a bigger price tag. Corporate write-downs and losses have already mounted to over $500 billion, with about half of that being borne by non-American firms ... The total public and private tally will greatly exceed that of the S&L crisis.

"While this may seem daunting, at this stage in the cycle, it is more important to head off a more painful, deep and extended economic downturn by enacting measures that can quickly restore market confidence and financial market operations in order to prevent a complete freezing up of credit supply."

In its forecast, TD predicts a mild world recession next year and little economic growth in Canada or the United States.

"Notably, while not crashing American style, Canadian real estate has come off the boil," TD says. "It is almost inconceivable that painful adjustments in our manufacturing sector have been completed. In all, these factors lead us to a profile for the Canadian economy that resembles the American. Essentially, more sideways movement on output with only a shallow recovery in late 2009."

OG. One of the "problems" with iTulip is the rich archive of data and information. Suggest you review this one by EJ:

http://www.itulip.com/forums/showthr...ight=deflation

[c1ue]

Re: Replay of Great Depression unlikely

In contrast, the modern Fed strives to keep prices from rising or falling dramatically and has unquestionably pursued a financial loosening over the past year, lending aggressively and finding new ways to channel cash to shaky institutions, the economists say.

OG,

Just look at this above excerpt.

Has the Fed's actions in the past year been to strive to keep prices from rising or falling?

Or put more directly: is the rise in commodity prices due to or in spite of the Fed cutting interest rates dramatically in an attempt to 'forestall deflation'?

Isn't the statement of 'lending aggressively' and 'finding new ways to channel money to shaky institutions' really just saying that "the modern Fed strives to keep (FIRE institution stock) prices (and equity) from falling dramatically"