Actually, this is basically the point I was trying to make to IdahoMauleMan. He was attempting to exonerate laissez-faire economics from responsibility for the Depression by claiming that no laissez-faire policy had ever resulted in an 11-year downturn. I thought it was worth while to point out that laissez-faire policies (or at least, as laissez-faire as the modern US ever has seen or will see) were what got the Depression started in the first place.
I agree, of course, that it’s no more reasonable to place the whole responsibility for the severity of the Depression a priori on laissez-faire economics than to place it a priori on interventionist policies.
GDP is linked to the actual incomes of the residents of a country which determines the goods and services they can buy and their actual standard of living. It is a far more important measure of economic welfare than any stock index especially back in the 30's when only a tiny number of people owned stocks. Not to mention the fact that market expectations of future profits are frequently wrong particularly in a volatile depression economy. And incidentally even the DJIA improved markedly during Roosevelt's first term like practically every other measure of economic well-being. What Shlaes is doing is cherry-picking the statistics which improved the most slowly not because of any coherent economic reasoning but simply because that is what fits her politics.
The fact is that Shlaes doesn’t have the intellectual background to write seriously about the Great Depression; she has a degree in English and has been a professional columnist. Perhaps she has studied Economics intensively but I doubt it. For example what does she have to say about the gold standard which is absolutely central to understanding the Depression? (not a rhetorical question; I haven’t read the book)
I am sure it was no coincidence that you chose 1937, the year conservatives prevailed on FDR to cut spending, which promptly reversed all the gains made in the previous 6 years. When stimulus spending was resumed, so did the recovery. But you knew that.
Actually the growthrate of GNP in 1937 was 5.0% a hell of a lot better than the -8.5% of 1931. It was only in 1938 that it fell to -4.5%. And it climbed back to 7.9% in 1939. Growth in 34-37 was 7.7,8.1 and 14.1 respectively. But clearly that one bad year in 1938 proved that the New Deal was a flop…
Nope. If you want to measure the health of an economy, you have to look at a number of metrics, and unemployment is one of them. The fact that unemployment was steadily decreasing is evidence in favor of the notion the New Deal improved the economy. If Shales doesn’t understand this, then she is an idiot.
I don’t even know what this is supposed to mean. An indicator that measures only a small sliver of the economy is supposed to be more meaningful than an indicator that measures an extremely large percentage of the economy? That’s patently absurd.
But let’s look at your own words. “The DJIA reflects the confidence of the private sector…” (underline added). So, in your own words, the DJIA is not even an accurate measure of the actual ability of businesses to grow, but rather a measure of some people’s confidence. Which makes the DJIA as meaningful an indicator as the Consumer Confidence Index. That’s not to say it isn’t meaningful, but it’s certainly not as useful a metric to measure the overall health of any economy as GDP.
Finally, in the present day, we generally use GDP as the measure for defining a recession. If Shales wants to pretend that GDP isn’t meaningful, that’s up to her, but it’s not the way pretty much everyone else in the country defines economic upturns and downturns.
I don’t think anyone’s going to defend programs like the NIRA (which were only in effect in the first two years of the New Deal anyway). However, if private capital were “crowded out”, I would expect to see some decline in GDP and/or industrial production levels. Since we see increases every year until the '37 policy changes, then this is just meaningless conjecture. If capital “hunkered down,” why was industrial production almost back to pre-crash levels by the time the '37 policy changes rolled around?
I guess a DHS job isn’t a real job either. Next time I hear anyone talk about how Bush II pulled us out of the 2001 recession, I’ll be sure to use your argument that all the government employment created under Bush II doesn’t count as real jobs.
Is this what Shales actually says? Does she not understand the concept of a natural monoply? That is economics 101, and if she really doesn’t understand that natural monopolies have their own efficiency problems, then she has no idea what she is talking about and should be ignored.
And yet you cite a natural monopoly sector as evidence of private sector efficiency? I don’t think you or Shales understand what circumstances cause either the private sector or government to operate efficiently.
So?
Lack of government control and regulation is what caused the real estate bubble and led to the subprime meltdown. So, I say good.
Shlaes is an ignorant right wing hack. Her book works perfectly for other right wingers because they don’t want an analysis of facts by an expert, they want an “analysis” of “facts” by an “expert”, hopefully in book form because then they can point to it for support when they spout off nonsense. It also helps because it provides an appearance of equivalence. Paul Krugman writes books, but Amity Shlaes does too!
Clearly Shlaes started with her conclusion and wrote backwards. What I think would be very interesting, although not possible, would be to see what proportion of those who champion Shlaes’ book also championed Bush’s economic policy. I suspect that number is fairly high, and rightly so. Both groups do not care a whit about understanding economics, they just want to advance a premise.
What lack of control and regulation are you referring to, specifically? Would it be artificially low interest rates from the Fed and socialized risk via Freddie and Fannie? Or something else?
The gutting of Glass-Steagall in 1999 deregulated banks and permitted them to trade in mortgage-backed securities. Glass-Steagal should be reinstated and banks should be prohibited from creating these risky financial instruments. Enough banks have demonstrated they lack the independent discipline required as the stewards of their depositor’s money, so now they all must be compelled by law to limit the risk they engage in on behalf of their depositors.
I rise to quibble, sir! A minor point, trivial, perhaps, but that’s the trouble with quibbles. The banks risk-taking is not on their depositors behalf, unless the depositors were likely to share in the swag, er, “capital gains”.
In addition to this, there was a provision in the 200 Commodity Futures Modernization Act that exempted credit default swaps from regulation by the Commodity Futures Trading Comission (see this Time article).
There are also perverse incentive problems in the mortgage market itself. Most borrowers think that mortgage brokers are working for them. However, mortgage brokers are generally paid based on how big a loan they can procure, not whether or not they can procure the best loan for a borrower. There are number of ways to approach this problem (such as publishing default statistics for mortgage brokers, making mortgage brokers fiduciaries of borrowers, requiring borrowers to hire an independent analyst to clearly explain loan terms, paying brokers over the life of a loan (so they have an incentive to avoid defaults), and/or upping capitalization and insurance requirements for brokers). Which one is the best is a hijack of this thread, so I won’t go into it–I’m just giving an overview.
Then, there was a lack of regulation enforcement out of the SEC, mainly because of the Bush II administration’s philosophy, but with implicit support from a number of Congresscritters.
There were and still are a number of perverse incentive problems and information problems in the entire mortgage industry, and the whole chain of how mortgages are procured, sold and securitized needs to be overhauled completely.
I’ll add that I’m quite opposed to “lemon socialism,” so if you’re expecting me to defend the implicit Federal guarantees made to Freddie or Fannie (or any of the major banks or mutual funds) prior to the mortgage meltdown, then you’ll have to look somewhere else.
As for artificially low interest rates, IMO, it’s hard to tell how much of a contributing factor this would have been if there had been better regulation of the market. But in a virtually deregulated market with perverse incentives, rampant fraud, and serious information problems, it would have been better to have higher interest rates.
How about if we removed deposit insurance altogether, so that is no longer an issue to worry about? That way each depositor can select whatever place to put his/her money that he/she desires, and if the bank loses their money, it no longer becomes yours or my concern. Because that’s part of the problem, isn’t it? The risk of bad bankers behavior is effectively socialized to affect yours and my wallet via the FDIC.
We could eliminate the FDIC in one fell swoop. Or perhaps, it could be made a standalone private entity, with banks choosing to pay premiums into its fund or not depending on their business plan. And then customers could choose ‘FDIC insured’ banks if they wish.
It might also be helpful to make the currency convertible to a commodity at a fixed standard, so if you want to put your money under a mattress, or bury it in your backyard, you could convert it to a hard asset that would store value before you do so.
You realize that the lack of an FDIC in England led to a bank run last year? We haven’t had any in the US, thanks to the confidence in banks inspired by the FDIC - not for consumer banks, that is.
Do you think that you, I, or anyone else could have successfully predicted that WaMu was going to go under? If there were no FDIC, don’t you think there would be a run on it?
Before deregulation, the risk of bad bankers was reduced by regulation. Regulated banks have had few problems, even in this crash. There are two choices really. insurance and regulation, or deregulation and no insurance. Deregulation with insurance socialize risk. The second of these choices led to chaos in the early 1930s, before FDR declared a bank holiday. The first led to decades of steady, safe, growth.
The purpose of the FDIC isn’t to socialize risk. If banks were being properly regulated and paying proper insurance fees, then the government should rarely, if ever, have to backstop the FDIC. Which is one of the problems with the repeal of Glass-Steagall.
There are plenty of places for customers to store money without government backing. And if the government is going to back something (like money market accounts and hedge funds), then those things should be run the way the FDIC should be run - with proper insurance payments and proper risk management.
There are also already private insurance funds for banks. Far from giving customers more choice, your proposal limits the choices available to customers.
I think you’ll find that the countries whose financial sectors have been damaged least by the current problems have more regulation of banking, not less. I’m hard pressed to see how that argues for less regulation.
On that note, here’s a NY Times article on the behavior of India’s banking regulators during the bubble. While I wouldn’t advocate using the Indian approach to bank regulation in the US, it is an interesting data point in favor of regulation. Since the article is several months old, things might have changed there as well.