An Historian’s View Of The Banking Crisis

Bloomberg has an interview with historian Liaquat Ahamed that’s pretty intriguing. He discusses the similarities between the banking crisis of the 1930’s and today.

Ahamed: Under Herbert Hoover, Congress created the Reconstruction Finance Corporation, which was designed to provide loans to banks. It started in 1932, and it provided about $1.5 billion in loans that year.

Then we had the sort of unintended consequence that we’re seeing now with the stress tests. Congress said, “We’re worried about who’s getting these loans and whether they’re being used for political purposes. So we want you to reveal the names.”

Pressley: That sounds familiar.

Ahamed: At that point, the program almost came to a halt. Because banks were worried that if they revealed that they had taken RFC money, everyone would think they were in trouble and it would provoke a run.

Signaling Weakness

We’re getting the same sort of considerations at the moment. If you take government money, you’re signaling you’re weak and you may provoke the very crisis that you’re trying to forestall. So it failed to stop the bank panic at the end of 1932 and in ‘33.

When Franklin Roosevelt took office, he revived the RFC and expanded its mandate not only to provide loans but also to buy bank stock. In total, they dispersed about $3 billion in ‘33 and ‘34, of which maybe about half went to banks.

Amazing how we make the same mistakes over and over, isn’t it. Read the rest of the interview at Bloomberg to see how they solved the problem during the Depression.

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