STOP BLAMING FDR

Paul Krugman and other economists have been attributing the 1937 recession to actions by FDR. They say he was merely following advice regarding the attempt to cut spending and balance the budget. However, whatever FDR did, there still would have been a recession. This is because the Fed, which is independent of the executive, raised the reserve requirement substantially during the same period. From 1917 until August 1936 the Central Reserve City Banks had a reserve requirement of 13% Starting if August of 1936, through May if 1937 , the Fed raised the rate to 26%. The rate for Reserve City Banks went from 10% to 20% an d for country banks the rate went from 7% to 14%.
The reserve requirement is the percentage of deposits that banks are required to hold at the Fed. This is money that cannot be loaned out. If the reserve requirement is raised banks have to either gather in a large number of new deposits and/or reduce lending. Given that the recovery was still ongoing, substantially increasing deposits was problematical. Instead, given the substantial increase in the Reserve Requirement, banks had to virtually halt all new lending. This alone would have caused what we now call a recession. (Note: I believe that FDR coined the term "recession" as a description of a slowdown in economic activity at this time)

So stop blaming FDR.

IS DON QUIXOTE BERNANKE FIGHTING WINDMILLS WITH HIS LOYAL SANCHO PAULSON BY HIS SIDE

Once Again I read the newspaper and I am astounded by the cluelessness of our economic leadership. Today there is talk that the Fed will again lower the interest rate at which banks lend to each other (The Federal Funds Rate). You would think that by now Mr. Bernanke would realize that the country is in a liquidity trap where the traditional tools of Monetary Policy are ineffective. This is evidenced by the fact that both Mr. Bernanke and Mr. Paulson have been pouring liquidity intro the systems and the banks have responded by buying other banks, paying dividends, and funding bonus pools instead of making loans with the new found liquidity. Attacking an economic crisis with monetary tools when the country is in a liquidity trap is akin to tilting at windmills in the hope of killing a dragon.

The time has come to start using Keynesian aggregate demand based economics instead of the pump priming of liquidity enhancement. The pump is primed; the liquidity is there. What we need now is someone to start demanding the water. This can only be accomplished by a government spending stimulus package that is large enough to turn the economy around. This means that we need to spend as if we were fighting a war. All of the criticisms of the New Deal boil down to the fact that even FDR was too timid in his spending proposals. Alan Greenspan set the precedent of a Fed chief commenting on Fiscal Policy. It is now Mr. Bernanke’s turn to push Paulson toward a fiscal stimulus. At a minimum this should be a set of loans to GM and Chrysler that would stave off a shrinkage in demand. These two firms will eventually have to file for bankruptcy, but the inevitable can be delayed until the economy is better able to manage it and congress has time to arrange a post filing financing package which will mitigate the worst effects of a filing.

THE COMING DEPRESSION

Now that congressional Republicans have decided that they want narrow political expediency to defeat the bailout package I am fearful for the future of our nation and the rest of the world, Although I did not believe that the proposed compromise was the best way of handling the problem I felt that an expedited poor plan was better than no plan at all.

People and markets are driven by expectations. If they believe that something will be done to alleviate a problem they will act as if the problem has been solved. On the other hand, if they see political divisiveness, they will act as if the problem will never be solved. This means that the financial markets will see a flight to quality. A flight to quality means dumping stocks and buying US Government Securities. The goods and services market will experience falling sales because people see their jobs as being in jeopardy, their 401k investments and savings shrinking while the value of their homes is falling. All of this will bring about further layoffs and a downward spiral in both consumer confidence and sales. I really don’t know a better description of the factors leading to a depression.

I know that many commentators believe that we now have the opportunity to do the job right. I do not believe that we will. The republicans believe that a total reliance on a market solution will solve the problem. In fact they are calling for market solutions devoid of regulation. This is what got us into the problem in the first place and the democrats would be dumb to go along with it.

On the other hand the democrats are calling for a “New Deal” type solution which might actually work. The problem here is that the republicans are so opposed to anything that smacks of the “New Deal” they’d rather sink the country than let it pass. They will throw procedural road blocks to the system that would prevent any solution that didn’t give the market reign.

We are still a month away from the election and three months from a new congress and president. In that amount of time we can face a complete economic, as well as financial, collapse. If our congressional leaders cannot create a new solution before the end of the week it will be too late. I am afraid we are destined to relive the great depression. Hello 1932. Hoovervilles will be Bush Bergs, Buddy can you spare a dime will become fella can you spare a 5, and 25+% unemployment will rein.