No Paul, It’s Not Like 1929
Paul Krugman pulling an obvious slight of hand. He gives us a brief description of what he thinks happened to make the Great Depression “Great:”
Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.
This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.
Krugman forgets monetary policy’s role. He needs to re-read his Milton Friedman. He would also be well to remember the fiscal mistakes by Congress and President Hoover as noted by Philip Klein.
The vast majority of his column talks about regulating banks when the crisis is with the investment banks. Bear Stearns doesn’t take deposits like your neighborhood bank. Their customers are institutions, hedge funds, investors with fat wallets who really work the financial markets. Unlike commercial banks investment banks’ deposits aren’t insured by the federal government. If Bear Stearns were a small Wall Street firm her liquidity problems wouldn’t have resulted in any Fed action. But Bear is tied up in so many billions of dollars in trades that the Fed and the Treasure Department felt it would have been disastrous for it to slip into bankruptcy. Their action seems to have eased concerns for now.
Krugman then writes about how Wall Street “wrigged free” from post-Depression rules:
For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.
Krugman doesn’t want to say this but many of those savers are your neighbors and friends who wanted to earn more than the paltry interest rates passbook accounts offer. Higher interest rates encourage more savings something Krugman is sure to support.
Most importantly Krugman fails to mention how easy credit and the federal government’s encouragement of home ownership set off the housing bubble that was fed by lenders who decided things like down payments didn’t matter. That’s what I call “government failure,” yet Krugman’s willing to put his faith in those same institutions.
The history lesson was fine but not as applicable as Krugman would like. Lesson from the past surely need to be learned, but each financial crisis is unique in itself.
“Partying Like It’s 1929” [via memeorandum]
[picture via pingnews.com]
