Useful Thoughts On The Great Depression

It’s a tough night to concentrate on writing. I’d rather be indulging my political junkie side and getting an overdose of network analysis. Nevertheless, I do want to pass on to you a couple of very interesting articles I read in the past few days.

They are both from the Wall Street Journal, pertain to the Great Depression, are complimentary and have some good thoughts that need to be noted as we move towards a hoped for correction in this economy.

The first was written by Russell Roberts an economics professor at George Mason University. In the article he points out that even before Roosevelt was elected, Hoover was frantically pulling the levers of government in a vain attempt to get the economy moving again. He notes that Roosevelt in many ways simply upped the ante and threw more money at the same set of programs that started under Hoover. The point he makes well is that most of the actions taken by both administrations was done in a helter skelter manner. Hoping that something would work.

Mr. Roberts draws parallels with the Bush administration and its erratic, urgent attempts to deal with the current crisis. The massive accumulation of power that is currently occurring is eerily similar to the New Deal and all is justified as he says by “…the need to do something.”

He advances an interesting thesis as to how the attempts to right the economy actually contributed to the Great Depression and asks if we might be going down the same road.

A recession is coming (or has already arrived) no matter what happens in
Washington. The question is whether the attempt to forestall it is going to make
it worse and turn it into another Great Depression.

By acting without rhyme or reason, politicians have destroyed the rules of the
game. There is no reason to invest, no reason to take risk, no reason to be
prudent, no reason to look for buyers if your firm is failing. Everything is up
in the air and as a result, the only prudent policy is to wait and see what the
government will do next. The frenetic efforts of FDR had the same impact: Net
investment was negative through much of the 1930s.

Does that not resonate with you? How else could on explain the spectacle of thousands of small and medium sized banks lining up for a capital infusion. How else to explain the Treasury proposing to invest (partially socialize) numerous industrial countries. How else to rationalize a massive bailout for individuals that cannot pay their debts. Forgo the free markets and join the state.

Mr. Roberts offered one other observation that bears repeating.

Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.

What more need be said, save to end with a quote from his article. “The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course.”

The other article ties nicely with Mr. Roberts’. It is about the myths of the Great Depression. Written for the WSJ by Andrew Wilson, a former Business Week writer, it debunks many of the long held beliefs about the times. One of the more interesting sidelights about the column is the spotlight it shines on Hoover and shows him rightly as not the typical pro-business President as he is portrayed to be, but more realistically as the President who provided the blueprint for Roosevelt’s policies.

I will leave you to peruse the myths he lays out. The more interesting to my mind included a good debunking of the idea that the market crash of 1929 caused the Depression, that ordinary people were truly helped by the actions of the government and that the actions of the government pulled the economy out of the depths. Nothing of the sort happened.

Mr. Roberts’ ends his article suggesting that that with as much as stake it is to be fervently hoped that we don’t adopt policies based on myths. Advice worth taking.

I don’t know, and in fact I don’t believe, that we are heading for a depression. By the same token, I respect and am a student of history and think there is much to learn therefrom. If we don’t heed the lessons then we do risk making a bad situation much worse than it need be.

Tom Lindmark

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