Brother Can
You Spare 10 Grand?
Peter Schiff
The
grainy footage of Great Depression soup lines and Hoovervilles now in heavy
rotation on the major news outlets has been largely counterbalanced by a parade
of economists who reassure us that such a protracted downturn is currently
inconceivable. Their confidence stems
primarily from the belief that government safety nets enacted since the New
Deal, together with a Fed chairman who is a self-professed depression buff,
will prevent a replay of the 1930s. As usual, this analysis is woefully
optimistic and sidewalk pencil sales may in fact be a growth industry.
Although
Bernanke may have spent much time studying the Great Depression, his
understanding of it is anything but sound.
That epic slowdown resulted from a series of policy mistakes, first by
the Federal Reserve and then by the Federal Government. Bernanke’s view is that these mistakes were
simply not large enough. What the
current Fed chairman does not grasp is that the seeds of the Depression were
sown during the “roaring” 1920s when the Fed, in an effort to support the
British pound, kept interest rates much too low. It was this unnaturally cheap money that
fueled a raging stock market bubble. In
1929, when the Fed finally came to its senses and raised rates, the bubble
finally popped. In his reading of this
history, Bernanke ignores the effects of the overly easy policy and simply lays
blame on the tightening.
As
the recession progressed, both Hoover and Roosevelt, in politically inspired efforts to ease the
pain, repeatedly interfered with free market forces working to correct the
imbalances. This ultimately turned what would have been an ordinary,
though perhaps severe recession, into what we now call the Great
Depression. This time around, the Greenspan/Bernanke Fed blew up even
bigger bubbles and both the Fed and the Federal Government now show an even
greater commitment in preventing free market forces from rebalancing our
economy. As a result, similar to the way
that the “War to End all Wars” had to be rechristened after 1939, future
historians may need to come up with a new term for the Great Depression.
Rather
than acting as safety nets, the programs now being devised by government will
act more like snares, further impeding market forces from righting the
ship. But for those who insist that a new “New Deal” is needed, it is
important to retain a sense of scale.
Prior to the massive expansion of Federal programs in 1933, the
government was very small relative to the economy of that time. Though I believe that many of the economic
policies of the New Deal were unwise and simply prolonged the Depression, at
least back then we could afford them.
Today of course, the Federal Government is already enormous, and any
increase in spending will either have to be financed by further borrowing from
abroad or though additional money printing by the Fed.
For
his part, Bernanke blames the Depression on the Fed not printing enough
money. Had the Fed done precisely what Bernanke now thinks they should
have, the Great Depression would have been much worse. Had the Fed tried
to re-inflate the stock market bubble or keep it from bursting in the first
place, it’s the dollar that would have collapsed, and Depression-era America
would have looked liked Weimar Republic Germany. As bad as the Great
Depression was, hyperinflation would have made it even worse.
The
good news is that there is still time to alter course and steer clear of both
hyper-inflation and depression. The bad news is that if we remain on our
current course that is precisely where we will end up. Our days of
dominating the global economy are clearly coming to an end. The only
question is will we follow the path of Great
Britain or Argentina?
April
11, 2008
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