Wednesday, September 08, 2010

1937 Redux? Not Really

Krugman, who now sounds like a one-instrument band (hint: Keynes), forgets about OTHER events in 1937.

Fortunately, John Lott doesn't forget as easily.

Economist and New York Times columnist Paul Krugman, has this to say in The Times earlier this summer, declaring that those opposing more government spending were pointing us towards disaster: "It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession."

Yadayadayada, Paul.

...there were other major economic events that both these discussions completely ignore. The late Milton Friedman pointed to new banking regulations that went into effect from March through May 1937. President Roosevelt had accused banks of "hoarding" money and his solution was to increase the reserve requirement with the Federal Reserve, dramatically reasoning that the government could make sure that the banks' money was properly spent.

Without regard for "wisdom" at the Fed--questionable in and of itself--jacking reserve requirements ALSO diminishes lendable dollars. Contraction, anyone?

And there's more:

Banks had very good reasons not trust the Federal Reserve. When the Federal Reserve was set up in 1913, banks lost crucial tools that they had to stem runs were depositors tried en mass to withdraw money from their accounts. In exchange, the Federal Reserve promised to serve as a lender of last resort to temporarily tide over banks who couldn't cover withdrawals by depositors. However, in 1929 and later, the Fed reneged on this promise. Banks, left to fend for themselves, were forced to liquidate many assets and build up their cash reserves.

The ONLY Milwaukee bank to pay out depositors in 1929 was the Marine Bank (which later merged with the National Exchange Bank, then Bank One, then Chase.) All the rest, including First Wisconsin, closed their doors.

The real lesson from the 1937-38 is that government made the situation much worse by always trying to fix things.

A track record which remains almost 100% intact.

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