Wednesday, September 9, 2009
The Fed's Real Work
"'So it seems that we aren't going to have a second Great Depression after all,' wrote New York Times columnist Paul Krugman last week. 'What saved us? The answer basically, is Big Government. ... [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.' This is certainly a novel theory of the business cycles. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the US economy would have experienced a 'second Great Depression' were it not for the Obama stimulus plan. ... But the federal government didn't slash spending in the early '30s. ... Christina ... Romer also noted that 'recessions have not become noticeable shorter' in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer--11.3 months. The longest recession from 1887 to 1929 lasted 16 months. ... And bankers had no [Fed] to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent", Alan Reynolds at the WSJ, 21 August 2009, link: http://online.wsj.com/article/SB10001424052970203863204574347000967657192.html.
As Yves Smith would say, creating longer, deeper recessions is a Fed "feature, not a bug". Kill this monster. Bankers had no Fed? Does the Fed encourage them to take risks they otherwise wouldn't? What other responsibility has the Fed? Creating inflation. From 1792-1913, the US "price level" was stable. Since 1913 the dollar's gold value has declined 97.9%. Was this by mistake or design?