By Monty Pelerin, on March 6th, 2010 Can We Have Another Banking Holiday?
“But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time.” Murray Rothbard
One of the most painful and important aspects of the Great Depression was the failure of banks. It has been estimated that before the Depression there were more than 25,000 banks in this country. At the end of 1933, 14,207 were left.
Depositors lost all or much of their money when their bank failed. Most banks were small, not unlike the one depicted in Jimmy Stewart’s classic movie “It’s a Wonderful Life.” When a bank failed in a town, fear spread. A contagion developed that caused depositors to remove money from other banks and “hoard” it. This reaction put pressure on otherwise sound banks and the banking system. A self-reinforcing spiral reduced the availability of money resulting in additional closings.
One of the first New Deal legislative acts was the closing of the banks, known as a national banking holiday. Banks were closed for about a week. Neither deposits nor withdrawals were allowed.
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The Federal Deposit Insurance Corporation was formed in 1934. Its intent was to prevent future runs on the banking system that had occurred in the early years of the Depression. Sheila Bair, current Chair of the FDIC, referenced Milton Friedman who “once called
Continue reading Can We Have Another Banking Holiday
By Monty Pelerin, on March 2nd, 2010 Economic development vs. undevelopment affects lives. The populations of undeveloped countries live close to the subsistence level, often one drought, poor growing season or other exogenous event away from famine. But economic development does more than assure ample food production. It is often the difference between life and death in a number of ways. Recent tragic events in Haiti and Chile demonstrated only too clearly the advantages of a productive versus an unproductive economy.
Bret Stephens in The Wall Street Journal focused on building quality and stated: “It’s not by chance that Chileans were living in houses of brick—and Haitians in houses of straw—when the wolf arrived to try to blow them down.” The more wealth a country has, the more options it has. That is why poor countries tend to be worse polluters than rich ones. Clean air is a luxury good that persons barely eking out a subsistence living can afford. So too, are houses built to withstand hundred-year events.
Stephens editorial deals with Milton Friedman’s oft-criticized role in helping Chile rebuild its economy and some of the loonie left criticisms that were leveled at him.
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By Monty Pelerin, on February 27th, 2010 Tough Guy Bernanke Blows Smoke
Fed Chairman Ben Bernanke appeared before Congress this week wearing his “bad guy” face. I did not watch his testimony either day. Apparently, based on news reports and blogs, nothing of significance happened on the second day.
The Washington Times reported on Bernanke’s Wednesday testimony:
With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.
“We’re not going to monetize the debt,” Mr. Bernanke declared flatly …
These statements are unequivocal. It will be interesting to see how Bernanke rationalizes his way out of this testimony. I don’t believe he can stop and pointed the reasons out in an AT post, Obama’s Ides-of-March Moment is Near on 2/24.
My guess is that Bernanke’s wiggle room will turn on something akin to what the definition of “is” is. It is likely to turn on a narrow definition of Quantitative Easing (QE) or “monetizing the debt.” The Fed considers monetizing the debt a direct purchase of newly-issued Treasuries. But QE, as monetizing the debt is known, can be performed indirectly and, I suppose, claimed to be not QE
Here is a simple example illustrating both direct and indirect methods that show their equivalence. First the direct example: Suppose the Treasury was to issue another $50 billion of debt
Continue reading Tough Guy Bernanke Blows Smoke
By Monty Pelerin, on February 25th, 2010 A Wall Street Journal article reported: “The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.” I had to read that sentence several times to try and understand what it said. I still have no idea what it means.
You see, if the Treasury were able to borrow money, we would not have QE (quantitative easing). QE is when the Fed, directly or indirectly purchases Treasury Bonds because others won’t. Furthermore, I cannot see anyway that setting this fund up will “make it easier for the Fed to raise interest rates when the time comes.” What has this fund to do with raising interest rates? Is raising interest rates a difficult thing? Does the Fed need help doing so. Possibly, but only because they are so out of practice. Isn’t raising interest rates so simple a Caveman could do it, without help from the Treasury?
I read through the entire article several times. There is no way to make any sense of this move unless you believe the Fed intends to continue its machinations of adding more questionable assets to its balance sheet. After all, that was what the program was originally intended for. If the Fed is truly done with stimulating, there is no need for this fund.
It is likely this is merely Fed “smoke” or
Continue reading FED Bunkum
By Monty Pelerin, on February 24th, 2010
In Jimmy Carter’s reign, the Wall Street Journal editorialized about “Ratcheting to Ruin.” The title derived from the fact that each cycle high in unemployment was higher than previous ones, and each cycle high in inflation was also. “Stagflation” was coined to describe what up until then was believed to be impossible in the Keynesian world. This period ushered in a new era in both politics and economics. Carter was replaced by Reagan, and Keynes was replaced by Friedman.
Thirty years later Keynes is back in vogue, Obama has ascended to the White House and times are again reminiscent of the Carter era. The economy is awful. Fear and dissatisfaction prevail. Politicians are held in contempt. There is one major difference – Carter did not face an “ides of March” event.
In Shakespeare’s Julius Caesar, a soothsayer warned Caesar to “beware the Ides of March.” The prescient warning did not help Caesar. As Obama approaches his March moment, no warning can change his fate.
Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a “campaign promise” to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out.
Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama’s Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this
Continue reading Obama’s “Ides-of-March” Moment is Near
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Friedrich von Hayek
Friedrich von Hayek founded the Mont Pelerin Society.
“Monty Pelerin” is a pseudonym chosen by this blogger to convey general agreement with the philosophy, goals and spirit of the Mont Pelerin Society. No other connection exists between the blogger and the Society.
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