Fed allowed one third of US banks to fail during depression. FPG/Hulton file.
As we approach the 250 of our countryth Birthday, there is no better time to think about where we were and how we got here. However, Americans are surprisingly ignorant of our past. One reason: So bad story has entered the popular culture courtesy of bad historians, some bad economists and some talented writers such as Charles Dickens and Upton Sinclair, who did not understand history or economics at all.
To correct this problem, I highly recommend The Triumph of Economic Freedom: Excerpts of the Seven Myths of American Capitalism by Phil Gramm and Donald J. Boudreaux. Gramm is a former US senator and Boudreaux is a professor of Economics at George Mason University. Together they have combed through academic literature and wild disassembly myths about our economic history – myths usually taught in high schools and colleges across the country.
In this essay, I will address two serious economic downturn: the great recession and the latest great recession.
The great recession
There are five myths here, starting with the claim that depression was caused by capitalism and greed. In a different way, it is the idea that the worst economic downturn in our country’s history happened because of excessive individual freedom and very small government.
On the contrary, the authors write,
What failed in the 1930s was not capitalism. What failed was the US government. During the monetary, fiscal and regulatory policy, it turned what would be a common recession in a depression that has become the most traumatic economic experience in our nation history.
The worst failure was that of the Federal Reserve system, created to be a lender of the latest solution, providing liquidity to banks in times of credit crisis. In fact, the Fed stood, allowing one third of the nation’s banks to get out of business.
A second myth is the idea that in the early stages of depression, Herbert Hoover stood and did nothing. In fact, Hoover was a very activist president. Responding to the economic downturn, he increased taxes, increased costs, signed the Davis-Bacon law (securing higher wages in federal construction projects) and the act of Smoot-Hawley duties. Like many of Franklin Roosevelt’s policies, most of what made things worse, not better.
A third myth is that Roosevelt’s policies saved us from depression. In fact, they almost certainly caused the expansion of depression for 12 years – more than in any other industrial country other than France. The authors write:
The White House and Congress prevented the operation of the price system, prevented trade and threatened the sacredness of private property. And the courts will ultimately seal this unprecedented attack on the economy of the US market.
A fourth myth is that Roosevelt unites the public in times of crisis. In fact, Roosevelt was a divisor, not a uniter. He angered the successful industrialists who opposed his policies as “economic royalists” who were an “economic empire”. In fact, it is probably not an exaggeration to say that Roosevelt broke the rich in the United States, as Hitler at the same time was the abuse of Jews in Germany.
Texas University historian Henry W. Brands says that “Roosevelt has been worryingly close to demagogy not only Father Coughlin and the latest Huey Long, but also Europe’s fascists”.
The final myth is the idea that it got the huge increase in government spending during World War II to remove us from depression. If it were true, when the war was over and government spending was withdrawn vertically, we would have to be back in depression.
In the four years after the end of World War II, government spending declined by 75 %. The federal deficit decreased by more than 50 percent and then relaxed in a small surplus.
However, income, production and economic prosperity have continued to grow.
The great recession
After the Great Depression, the Great Depression – from 2007 to 2009 – was the most serious economic downturn of our nation. It included a sharp drop in housing prices, accompanied by a spike on mortgages, especially on high -risk loans. The Fannie Mae Federal National Association (Fannie Mae) and the Freddie Mac Federal Loan Company-two government businesses created to support home property-were forced management.
There are four myths here, starting with the claim that the recession was caused by excessive greed of the private sector and risk taking and very little government supervision. If anything, the other way is true. The lending of the sub -speaking actually became the target of the federal government – based on Clinton’s administration, mainly through the extension of the Community’s reinvestment law (CRA). The authors explain:
Using the recently extensive CRA requirements, banks’ regulators began to push banks to loan subcommittees. The guidelines were converted into orders, as each bank was assigned a letter rating to obtain CRA loans. Banks were unable to open ATMs or branches, much less to obtain another bank without passing – and receiving a passing grade no longer concerned with the coverage of local credit needs. Increasingly, the passages had taken their loans at home.
Until 2008, about half of all the pending mortgages in America-28 million in all were high-risk loans.
The second myth is that the crisis was caused by the lack of regulatory power. In fact, there have been a number of federal and state bank laws, which led to an army of regulatory authorities with the power to investigate, impose corrective actions and be good and even imprisonment.
The problem was that the traditional interest in meeting Community credit needs with healthy banking practices had been replaced by a new federal policy aimed at “accessible housing” available to more and more people.
A third myth is that the recession was caused by bank liberation-especially by the Gramm-Leach-Bliley (GLB) act. In fact, GLB has removed obstacles in the competition in the banking sector – making the financial sector more effective. However, the regulatory authority did not decrease. Increased. The Congress Budget Office noted GLB as an increasing regulatory cost.
Concerning GLB, President Clinton said: “There is not a single example of having to do with the financial crash.”
The final myth is the idea that the duration of the recession was somewhat caused by bank practices. In fact, an abnormally weak recovery was probably caused by increased sanctions on work and increased subsidies for non -work.
During the years of Obama, the authors say, “the American economy was hit by a tidal wave of new rules and regulations throughout health care, financial services, energy and construction”. At the same time, there was an explosion in registration numbers for disability benefits, food stamps and cash prosperity.
So why are these events so important to know?
George Santayana is rumored to say, “Those who do not learn from history are doomed to repeat it.” The experiences of the Great Depression and the Great Depression are events that no reasonable person should experience again.
