The Crash of 2008?

The American Cause ^ | November 16 , 2007 | Patrick Buchanan

[fweingart]

In March 1929, the Harding-Coolidge era came to an end. The eight years had witnessed the greatest peacetime prosperity of any nation in history: America in the Roaring Twenties. Early that March, Calvin Coolidge handed the presidency over to Herbert Hoover, who had just pulled off a third straight Republican landslide.

"I do not choose to run," said Coolidge, who could easily have won a second full term. Silent Cal went home. Hoover, whom he privately derided as "Wonder Boy," presided over the Crash of '29 and the first three years of the Great Depression.

History holds Harding, Coolidge and Hoover responsible for the Depression, with Treasury Secretary Andrew Mellon, and Reed Smoot and Willis Hawley of Smoot-Hawley fame, as accessories. As Voltaire observed, history is a pack of lies agreed upon.

Two men debunked the myth that the low-tax, high-tariff policy of the 1920s brought on the Depression. The more famous is Milton Friedman, who proved to the satisfaction of a Nobel Prize committee that the Depression was a monetary phenomenon. The Fed had opened the sluices, and the money had swamped the stock market.

When Wall Street crashed, there came a run on the banks by men who had bought on margin, a depositors' stampede, a bank collapse, a wipeout of uninsured savings and the loss of a third of the money supply, lifeblood of the economy. The Fed never gave the nation the needed transfusions. Hoover and FDR, misdiagnosing the crisis, raised taxes and wrote up new regulations, which was like putting a body cast on a patient in shock from the loss of a third of his blood

The Smoot-Hawley myth, repeated by John McCain in the Detroit debate, was demolished by Alfred Eckes of Ohio University, Reagan's man at the FTC and America's foremost authority on the history of trade and tariffs, in his 1995 "Opening America's Markets."

The point of this brief history: The recent hand-off from Alan Greenspan, the maestro of the Global Economy, to Fed Chairman Ben Bernanke may turn out to have been a lateral far behind the line of scrimmage, leaving Bernanke holding the bag for a recession for which he is no more responsible than was the hapless Hoover.

Last week, the stock market saw 4 percent of its value wiped out. Oil reached nearly $100 a barrel. The dollar fell to record lows against the Canadian dollar and the euro. The price of gold was $850 an ounce, signaling inflation and a worldwide lack of confidence in the Fed's ability or determination to defend the world's reserve currency.

The Chinese, with $1.4 trillion in reserves, perhaps 80 percent in dollar assets, indicated they may dump dollars and move into euros. Merrill-Lynch took an $8 billion hit. Citibank is signaling massive losses from its subprime mortgage debt. General Motors reported an operating loss of $1.6 billion for the quarter and a whopping $39 billion charge that is among the biggest profit hits ever reported

Where does this leave Bernanke? On the horns of a dilemma.

Exposure of all that subprime debt going rotten on the books of our biggest banks, the staggering losses being reported, the inability of homeowners to refinance or borrow any further against their equity, the credit crunch -- all argue for an easy money policy to get capital back into the economic bloodstream.

Thus the Fed has cut interest rates from 5.25 percent to 4.5 percent, thus the howls for deeper cuts, thus the market anticipation of another cut, though the Fed has said no more.

But the Fed is responsible not only for the national economy. It is responsible for defending the dollar, which represents the real savings and wealth of the nation. And that dollar has lost more value in seven years than in any similar period in modern history. A euro, worth 83 cents the year Bush was elected, has risen in value to $1.47.

As the dollar sinks, exporters may cheer rising sales, but at home we will soon find that the prices of all those imported goods from Europe and Asia down at the mall are starting to rise. U.S. soldiers, diplomats, tourists and businessmen overseas are already feeling the pain of a falling dollar.

If a recession is generally a sign the Fed should loosen up, a run on the dollar is a sign the Fed should tighten by raising interest rates to make dollars and dollar-denominated assets more attractive.

But the Fed's raising of interest rates would push up the rates on mortgages, credit cards and auto loans, and push millions of marginal folks into bankruptcy and the country into recession, a disaster for the Republicans.

But, given their free-trade fanaticism and free-spending ways, that fate would not be undeserved. Say a prayer for Ben Bernanke. He may have to eat the football that scrambling quarterback Greenspan tossed to him far behind the line of scrimmage.

[Freedom4US]

Wtf are you on about? LOL As it happens, Lindbergh, shot down at least one enemy plane in 1944. You could look it up.

[M. Espinola]

I believe your right.

Below is ARM chart data. In the first link click the chart to enlarge.

2008 will indeed be a financial roller-coaster year, and when other very unstable components on the international scene are added to the volatile financial mixture, such as Iran's Islamic lunatics & Hugo (The Red) Chavez attempting to use OPEC to crash the Dollar, along with Putin arming all our worst enemies (Iran & Venezuela at the top of the list) plus the Kremlin continuing to expand Russia's military at an alarming rate with billions in soaring oil profits.

More Subprime ARM Reset Data, Growing in 2010, 2011

ARM-Reset Chart, BofA

[M. Espinola]

"I was actually trying to compare 1929 Germany to 2008 U.S., assuming the dollar keeps tanking and all the foreigners start dropping their dollars & US holdings."

I agree and would add there are also 1938 & early 1939 similarities in terms of the mounting threats from America's most abhorrent enemies, some blatantly obvious, and other threats which Western leadership acts as though 1938 & 39 history never happen.

[unspun]

Pat's always so cheery lately.

[Hostage]

The real reason for the fall in the dollar was posted on FR just last week by a reputable economist.

The main reason is a difference in interest rates.

But now Europe is looking at slowing economic growth and the pressure is on them to cut their interest rates. So we will see a bottoming of the dollar and then a gradual rise as a new equilibrium is reached in global interest rate differentials.

[RussP]

Hey, all you folks who so admire Pat B. Didn’t he run with someone named Lenora Fulani of the Loony Reform Party a few years ago? I am just going by memory. Did I get the name right? Regardless, what do you have to say about that? Alcohol-induced, temporary lapse of judgment?

[fortheDeclaration]

The Fed never gave the nation the needed transfusions.

No, the Fed was the problem, it had been inflating throughout the 20's and the Depression was the correction.

[fortheDeclaration]

Thanks for the ping.

[cherry]

me too.....I filled up my car today...close to $45 for a Camry!!!!!

small strategies I try to use is when you do have to run errands, buy staples and household goods that you will need even though you don't need them right away.....

make each and every shopping trip worth it.....

always buy things on sale....

[Michael81Dus]

Excuse me, but the Deutsche Mark was one of the strongest currencies (= most stable) in Europe. And it continuously gained worth against the dollar. Maybe you referred to the East German (Commie) Mark?

[cherry]

I have worked my whole life ..part time for most of it, Thank God....I have saved some money in my 403b and I could lose every penny if this market crashes...

I have no idea what to do......

I agree that the PTB could stop all the immigrants if it wanted to.....just like the drug trade, which could be irradiated too if only so many govt officials weren't involved....MY opinion only of course...

[cherry]

people are not buying tvs and computers every day....

they buy milk(up!) and eggs (up!) and gas for their cars...(way up!!!)....

they pay for medical insurance and drugs.....they pay more for car insurance....property taxes are way, way up there.....

we could all get along fine without new clothes but we all need the basic food groups.

[LowCountryJoe]

But, the real question is whether or not I’m misreading PJB. And also if PJB had misread Friedman.

[logician2u]

It’s widely acknowledged that one of the chief causes of the *crash* of the stock market (or rather, the huge runup prior to the crash, take your pick) was “easy money” via the FED, which worked its’ way into the market for speculation, usually on margin.

There is a continuing debate on the causes of the Great Depression, although economists are starting to converge on the reasons for it lasting so long in the U.S. while most of the rest of world was back to normal by the mid-Thirties. Something to do with FDR's policies, wouldn't you know?

Friedman and Schwartz made much of the Fed's geeing where should have hawed after the Crash of '29, reducing the real money supply by 1/3 when there was need for more money, not less. The deflation that resulted caused banks to fail and borrowers to default when they were unable to meet scheduled payments. Farmers were especially hurt, as most of the farmland that had been newly added during the '20s was heavily mortgaged and grain prices dropped precipitously after the market crashed. The Smoot-Hawley Tariff also had a detrimental effect on farmers, as they found it more difficult to sell any of their produce abroad after other countries retaliated with their own trade barriers.

The Austrian School, which has always emphasized that government actions meant to help people can have unintended but opposite consequences, blames the Federal Reserve for the Depression. Among other things, it inflated the money supply all through the '20s as a way of protecting our ally, Great Britain, as they were attempting to re-establish a pre-war gold standard for the pound. The inflation caused malinvestment, an overheated economy and rampant speculation (think Florida real estate). After the Fed tightened in 1928, the party was over.

Who's right? Maybe a little of each, or maybe none.

One thing we can agree on: it wasn't the failure of capitalism. Another, I hope we can agree on: The New Deal did not save capitalism.

[jrsmc]

Anyone who actually believes that real inflation is at 20%

Monetary inflation is at 20% but there is a lag before it hits consumer prices.

In this intervening period the smart money buys up the hard assets. By the time the mainstream knows they are reamed it's way too late and we have a recession.

[Freedom4US]

The New Deal did not save capitalism.

That seems to be an "establishment" view today and held by some certainly left-of-center folks who probably don't hold capitalism in a very good light. Why are they wrong?

[jmeagan]

***what? Thats like saying PC’s would cause a depression. Automobiles made business more efficient like the PC.***

In general, productivity increases are good. However, there has never been such a quantum leap in productivity in the economic history of the world. If productivity increases 100%, that means one person out of two is out of work and looking for another job.

Also in farming and transportation, the two areas most affected by the huge increase in productivity, the demand curve is pretty flat. Lowering food costs 50% would not cause a large jump in the usage of food. The same holds for the transportation industry. Compare that to what happened when H. Ford lowered the cost of a car. The subsistence farmers had only one use for the Sears catalog.

[flaglady47]

“Every week Pat preaches that the sky is falling. And yet it hasn’t happened.”

Oh yeah? He was right on illegal immigration, wasn’t he?

[Thinkin' Gal]

Or maybe I'm just paranoid.

Speaking of tinfoil...

... how about aluminum foil these days? It's so thin it's useless. I have to buy the "heavy duty" foil. I wonder how long until they come out with an "ultra" thickness foil and start price increase and skimping cycle anew.

Oh, and don't get me started on musical concentration and price games WRT dish soap. "Ultra" my a$$... Same goes for laundry detergent.

[rb22982]

Every day doesn’t matter as cost for the whole year. How much of your budget is eggs? Mine is .1% for the year. If it doubled it would be .2. Milk I don’t buy but even if you drank 2 gallons a week, that’s only an extra $100 a year. As a % of my budget that’s barely even noticeable. Gas is the only thing that really would dent most people’s real budget. People buy TVs, Computers, Clothing, Ipods, DVDs, PS3, Xbox, Wiis, etc etc whether you like it or not and generally make up a big portion of a person’s annual budget. Also housing is dropping as well.