Saturday, January 03, 2009

Ben Bernanke on the cause of The Great Depression

Seeing as how Bush / Obama / Bernanke / Paulson and the Gang of 535 seem to all wanna talk of the "need" for Bush's Billionaire Banker Bailout and Obama Claus' Stimulus Package because of the potential for another Great Depression, I think history must be revisited.

So you wanna know who Ben Bernanke blames for The Great Depression?

Just read The Federal Reserve website - Bernanke offered these comments at the nintieth birthday party of Milton Friedman in 2002:

For practical central bankers, among which I now count myself, Friedman and Schwartz's analysis leaves many lessons. What I take from their work is the idea that monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background"--for example as reflected in low and stable inflation.

So Bernanke acknowledges that a "stable monetary background" is the best medicine for avoiding calamity? Which begs my question... a "stable monetary background" is more likely to be found with:

1) fiat money - this is when Hank Paulson turns on the printing presses and tells us that money grows on trees


2) sound money - this is when money is backed by something that does not grow on trees... for example, gold or silver or some other commodity

Bernanke continues:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Bush's Bernanke and Obama's Geithner both need to go before they completely destroy the dollar with their printing presses.

Tim White


Shalom P. Hamou said...

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings it doesn't create $1 of investment.

It does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on savings.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order


This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money

tim white said...

Generally speaking, I think it's fair to assume that people are willing to work over the course of their lives. Therefore, I'm not convinced that credit should be eliminated for, say, housing.

Ignoring the current "no income, no money down" mortgages, I think it's reasonable to continue extending credit for a more traditional home mortgage (30 yrs, 20% down).

tim white said...

If we:

1) returned to sound money
2) required banks to maintain sound reserves
3) penalized those who did not fulfill 1 & 2

then it seems to me that fractional reserve banking could work.

But I'm not an economist. I just play one on this blog. haha.

Anonymous said...



I am not sure why you say that if we return to sound money, then fractional reserve banking could work.

Fractional Reserve Banking is money multiplying. Sound money is backed by something tangible, say artificial turf.

So if the central back issues a $100 backed by artificial turf to a commercial bank, they can loan out (at a 20% reserve requirement), $400 (of course the money has to be loaned and deposited several times). So now we have $500 of debt backed by the same amount of turf.

So the value of the dollar decreases. It will take $500 to buy the same amount of turf.

Bernanke is not going to take the same monetary policy tact as was done during the Great Depression; he is going to go the Quantitative Easing route. This will have its own set of CONSEQUENCES; none of them good for the long term. And none of them able to avoid a depression (according to Mr. Hamou).

Best Regards,

Mike Ulicki

tim white said...

So now we have $500 of debt backed by the same amount of turf.

I'm thinking that $100 is backed by gold and $400 is backed by the house. That would allow for the house to lose 20% in value without the bank losing anything (and requiring a bailout).

And though Vegas, Phoenix, Florida houses have lost more than 30% in value over the past year or so... if the 20% down requirement had been enforced for the past five years... the house prices (probably) wouldn't have risen so high... and in turn wouldn't be falling more than 20% (if at all).

Again, I'm no expert. So I may very well be missing lots of simple, necessary pieces of this puzzle. But that's how I see it right now.

Anonymous said...

Hi Tim,

First the bank does not lose anything from a 20% decline in value because the home owner has lost it in his down payment (it appears that you are stating the 20% reserve requirement limits the banks exposure), not because of a 20% reserve requirement. If there is no down payment then the bank has an asset on its balance sheet that has lost 20% from its value.

Yes you are missing some very important pieces of the puzzle. In my example $400 of money (actually debt) has been created out of thin air and has entered the money supply. Now if the economy (not our consumer debt based economy) is increasing then this additional money supply can be absorbed without consequence (that consequence being inflation).

However a house is not a store of value nor a medium of exchange and it is not savings. It is a depreciating asset. The reason it goes up in price is because we have more of that money made out of thin air in circulation, the money is worth less and the house commands a higher price.

There is more to it, so much more and too much for blog posting. You should check out Peter Schiff’s book Crash Proof; it lays out the basics very nicely. If you are interested you are more than welcome to borrow my copy; provided I can find it.

Also I find it very refreshing that you admit when you do not know or understand something fully.

Best regards,

Mike Ulicki

Anonymous said...

"However a house is not a store of value nor a medium of exchange and it is not savings. It is a depreciating asset"

Nope. As Mark Twain pointed out, the reason real estate is an investment is they ain't making any more of it.

The American population continues to grow and desire suburban living. Therefore, in the long run, property values should increase---but not at the artifically induced rates of the mid 00's. This is especially true in what Paul Krugman called the "zoned zone"---the northeast and California---where scarce land and tough zoning restrictions make it difficult to add housing stock quickly when demand rises.

The physical building may wear out, but when one buys real estate one gets the right to use the land where the improvement is placed

Anonymous said...

Mr Twain,

It is hard to argue with your points, but then again I would be a fool to argue with Mark Twain:)

However they do not apply to the point I am trying to make. I am talking about money not investments. Having money backed by real estate would not be feasible as a medium of exchange. Futhermore I am speaking to the house or the building as a depreciating asset not the real estate. I do not think you should have money backed by that.

Lastly, you are correct they are not making anymore real estate, but as Tim White likes to say the Obama/Bush/Geithner/Paulson/Greenspan/Bernanke team is making plenty of money.

Best Regards,
Mike Ulicki