FDR's policies prolonged Depression by 7 years, UCLA economists calculate

FDR's policies prolonged Depression by 7 years, UCLA economists calculate
By
Meg Sullivan
| 8/10/2004 12:23:12 PM

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

Stuck in the Cold

Senators McCain, Obama, Biden, Governor Palin, and their senior colleagues are all Cold-War leftovers—secular imperialists, really—chaffing to involve America in wars where no U.S. interests are at stake and those started by their own democracy-crusading. The difference between parties is just nuance: Republicans prefer to provide a strong, close-up whiff of gunpowder before coercively imposing their values on foreigners, while Democrats prefer raining anonymous death from 20,000 feet on foreigners, who – if they live – will have new values drilled into them. All are imperialism’s paladins and, like Rudyard Kipling and Woodrow Wilson, they are: aching to dictate their kind of freedom to various little brown brothers; willing to kill those who obstruct efforts to make the world made safe for the brand of democracy they peddle; and eager to use an M-16 or two-ton bomb if it takes that to teach their undemocratic, Muslim brothers to elect good men.

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DO SOMETHING

From Paolo's blog

I saw an interview on CNN the other day, in which the reporter asked <he who must not be named> what he would do, RIGHT NOW, this split second, to get us out of "the Crisis." <he who must not be named> began to respond that before you proposed solutions to a problem, you have to understand what caused the problem. He began to patiently explain how government creation of money and cheap credit caused the problem, but the reporter cut him off. Again, the reporter insisted he offer solutions for the problem RIGHT NOW, without explaining the cause of the problem.

This, I submit, is the problem. Until people are willing to invest a little time in understanding economics, they will always be vulnerable to this charade of lurching from false prosperity to crisis. Economics is really not difficult to understand, at the fundamental level; <he who must not be named>'s favorite school of economics, called the Austrian School, is loaded with Nobel Prize winners and features plenty of thick books filled with difficult prose. But at root, the basic principles are not difficult to understand.

A few sentences are all that is required to explain the roots of the current crisis. The government, trying to give the illusion of prosperity, has inflated the money supply. The excess money goes to buying all sorts of products. Producers, seeing their inventories go down, order an increase in production. Financial markets, seeing the increased production and increased sales (in terms of cheap dollars), decide to invest in these companies. New companies, in this environment, spring into being in the form of Initial Public Offerings (IPO's).

No matter where investors put their money, they seem to win. Companies with no track record rise in value, on paper. Large investment firms begin to direct ever-larger amounts of (cheap) cash into whatever makes money, which is just about everything. Housing and stocks, which seem always to go up in price, get the most investment.

This, ladies and gentlemen, is known as a "bubble."

But a bubble can only go on for so long. Because so much phony money and credit has been pumped into the system, prices begin to rise as more and more money chases the same goods. Those who don't earn enough to invest huge amounts in the bubble are particularly hurt as prices of everything start to rise. Eventually, the economy reaches a point where either you let the bubble burst, liquidating bad investments, and allowing prices to plummet, or you keep pumping in more money in a frantic attempt to keep prices high.

The latter is the approach of both major parties. If enough money is pumped into the markets, you can keep the drunken orgy going a little bit longer. During this time, prices will begin to rise even more precipitously. Food prices will double. Gas prices will triple. Soon, the entire lower and middle classes will find it difficult just to buy groceries and fill their gas tanks. They will begin to scream for Washington to DO SOMETHING!

RIGHT NOW!

Whose Fault was It?

Whose Fault was It?
October 8, 2008
Alvaro Vargas Llosa

WASHINGTON—As was the case with the 1929 crash that ushered in the Great Depression, the current financial meltdown is giving rise to myths that will influence public policy for decades to come. It is imperative that those myths be debunked before the next U.S. administration starts to make important decisions, followed by many other countries. By far the most dangerous myth is that deregulation is the root cause of the problem.

Yes, Wall Street firms were greedy, irresponsible and, in many cases, downright stupid. But those are fairly constant features in any society and there is no reason to believe that investment bankers were any more greedy, irresponsible and stupid in 2007 and 2008 than, say, five or 10 years earlier.

As many authoritative economists are desperately trying to explain amid all the confusion, the culprit was a system geared toward loaning money to people who were not in a position to pay it back. Two policies underpinned that system: easy money by the Federal Reserve and the government-induced lowering of standards for approving loan requests.

Lorenzo Bernaldo de Quiros, a leading European economist, is adamant that the crisis could have been avoided but for “the lax monetary strategy put in place by the Federal Reserve between 2001 and 2004. ... That is what caused the exuberant and unreal rise in the value of stock market and real assets, the excessive leverage on the part of families and companies, and the inevitable collapse of the house of cards once inflationary pressures forced the central bank to tighten its policy.”

The Fed’s policy would explain why asset values rose unrealistically, but not necessarily why they did so predominantly in the housing market. And here is where the second set of policies underpinning the system comes into play.

In a recent paper for the Independent Institute, University of Texas professor Stan Liebowitz argues that “in an attempt to increase homeownership...virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s.”

The government-promoted increase in homeownership dramatically increased the price of housing. As many as one in four buyers purchased property with purely speculative intentions. When prices stopped rising, the speculators tried to get out of the market. The rest is history. Read the rest...