This comes from Adam Levitin at Credit Slips:
There are lots and lots of differences in the financial institutions situation of the Depression and today. And yet there are some remarkable parallels in the problems and government responses. We shouldn’t overread parallels as predictive matters. But some of them are pretty astounding:
Banks in the early 1930s found themselves undercapitalized after profligate lending in the 1920s. Banks reacted by carefully hoarding their remaining capital and not lending (not that there were many creditworthy borrowers available). The result were frozen credit markets, just like today.
The Hoover administration first tried to fix the problem without involving the government directly. Instead, the government merely facilitated the formation of the National Credit Corporation, a private central lending institution. Sound familiar? Remember the MLEF (Master Liquidity Enhancement Fund), a SIV of SIVs that Treasury tried to coordinate back in the fall of 2007, only to have the banks refuse to pitch in.
Next, the Hoover administration (a lot of New Deal institutions were Hoover inventions) attempted to bolster bank capital through direct government loans through a government agency called the Reconstruction Finance Corporation. The loans didn’t do the trick though. We tried some direct government lending support for faltering institutions: AIG, discount window lending to investment banks, government support for JPM purchase of Bear Stearns, FDIC guarantee of Citi’s planned purchase of Wachovia. While this lending support might have helped prevent a worse crisis, it did not solve the current one.
The Roosevelt administration then pushed through the Emergency Banking Act (cf. Emergency Economic Stabilization Act) that expanded the RFC’s powers to include government purchase of preferred stock from banks. Banks didn’t want to sell preferred to the RFC. It took RFC chair Jesse Jones telling the American Bankers Association that if they didn’t get with the program and start lending again, the government would go into the direct loan business itself. The banks sold preferred to the RFC. I can only imagine what Secretary Paulson told the 9 bank CEOs would happen if they didn’t sell to Treasury.
In the end, the RFC bought lots and lots of preferred stock from banks. By 1935, nearly 1/3 of bank stock value was held by the RFC. The dividend on the preferred stock? Then, as in the current deal, it was 5%.
The recapitalization of banks alone was not enough to get them to start lending, however. They didn’t have enough credit-worthy borrowers. Government had to get into direct lending itself. Compare this with Secretary Paulson’s declaration that the banks that received the forced equity injection from the Treasury had to deploy it. But also notice, that we’ve moved in the direction of government direct lending anyhow: the Fed is buying commercial paper (using a special deposit from the Treasury to do so) and FHA-insured refinancings as part of the hapless HOPE for Homeowners Act are equivalent to mortgage lending.
In the 1930s, the government had another major lever, however, to get credit markets going again in the 1930s. RFC preferred stock, unlike the preferred shares that Treasury is going to buy today, came with equal voting rights to common. The RFC exercised this to put its own managers in place at major financial institutions. The result was a distinctive type of state-capitalism. Arguably, Treasury might have done better to take preferred stock that would give it stronger control over bank management.
51 comments
Comments are closed.
I just saw Bill Maher quote this on his show tonight in regard to current wealth polarization being at 1928 levels.. figured its a little relevant to the post. As Maher said, it’s a good way to “kitchen table” the this.
“As in a poker game where the chips are concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”
Marriner S. Eccles
(FDR’s FED Chairman)
1951
Maybe there are some weird curious modern-day parallels because of the LHC:
What Happened at the Large Hadron Collider
http://www.technologyreview.com/blog/editors/22154/
Yesterday, CERN, the European Organization for Nuclear Research, released a report detailing what went wrong. Steven Nahn, an MIT physics professor currently working from CERN, says that the analysis took some time because the area had to be warmed up from near absolute zero before it could be accessed for investigation. The problem, the report concludes, arose because of a faulty electrical connection between two magnets, which led to mechanical problems.
Are we moving more quickly this time? I’d hope we are setting a lower, more appropriate bar, for when the next more extreme solution is called for, compared to the 30’s.
Bottom line: It’s over. Next stop global resource war, conquest for oil. Again.
The historical parallels across over two generations time to which Levitin refers are an instance of something which I call ‘affective recurrence.’ Not a great instance but a reasonably good one.
The funadmental matrices in large societies change sslllooooowwly. Institutional conditions also change slowly though somewhat less so, in this case the structural relationships between large public capital and direct public financial intervention in the US. That is, there a range of ‘normal perspectives’ which form a concept matrix or decision space amongst which public opinion will circulate gradually over time, but within the parameters of which it tends to remain. As part of this, when said societies run into conditions at time X which form a problem space from which the perspective matrix has to generate decisions, if they run into a similar problem space at time Y the perspective matrix is likely to cough up similar responses. There are actually periodicities to the circulation of the ‘center of opinion’ as it shifts around the perspective matrix over the long term, such that at similar periodic moments over the long term societies tend to ‘remember old ideas’ which are latent in the problem space because embedded in the culturem _but which are not continuously expressed with the same frequency or intensity_. This isn’t ‘certain to happen;’ conditions can swamp the anticipated oscillatory pattern, but the latter will reconstitute itself given enough time. Particularly at such periodically similar moments in the same society, if previously experienced conditions are encountered, highly similar responses are likely to be offered. This is sort of like institutional memory, but sort of not. (Everybody get that? Not. But I tried, so.)
I don’t advance that concept lightly, but it is not difficult to find historical sequences of the same. As a directly relevant example, land speculation manias—which is the ‘public’ part of the home mortgage bubble we have just seen—are a highly periodized phenomenon in American history. We have had them regularly in the US from at least c. 1750, and might have had them before if more subtle analysis is performed. The kind of borrowing stoopid at big leverage and soaring prices to buy property ‘which could only go up’ is very nearly _THE_ most pronounced, recurrent phenomena in American society. This was one reason why to me the mortgage mess had to be a bubble prima facie, because it fit the sequence and concept dead on time, the public ‘remembering an old idea,’ and generating the invariable outcome, i.e. *crrrasshhhhh*. (Evangelical revivalism is also a highly periodized social phenomena for some populations in the US.) So the idea that we would now be ‘regenerating’ prior solutions to a comparable instance of speculation (although the ’29 Crash was not principally a land speculation mania), is wholly in keeping with the overall conceptual model. There may be an explicit copying here, say of that 5% return on preferred; that is _not_ completely an instance of affective recurrence. But much of these kinds of phenomenae are not intentional and so even more responsive to the long-term pattern than to the nominal situation-specific declared purposes.
It is not comforting to know that, historically, American society has _not_ shot the bankers; we have generally bailed them, and at the very least informally pumped them full of money. We have never held them directly accountable, but instead allowed them to reconstruct their temporarily fractured structural advantages. Everything suggests that we will have ‘affective recurrence’ now in _that_ regard, too.
[Gods, I LOVE this stuff!]
The problem is a little different this time: securitization didn’t exist in the 1930’s, LBO’d companies didn’t employ millions of Americans, consumer spending wasn’t even a third of today’s 70% of GDP, the US was a net creditor, and US companies hadn’t issued fraudulent paper worldwide. The government isn’t going to replace the securitized markets where businesses raised debt for the last 10 years. How much are over-levered companies going to need over the next year to stay in business? –It won’t be coming from the capital markets. The banks can’t possibly take on balance sheet the leverage they have floated through the economy, and I don’t believe the government can either.
Don’t forget baseball. The Red Sox have just had the second best comeback in baseball history. The first? Athletics vs Cubs in *October 1929*. Coincidence? I think not.
Anyway, public officials, policy makers, and economists are *supposed* to pretend that they know what to do. When, alas, events outstrip their ability to do something, they will continue to try. I guess that’s praiseworthy in a way. Still, I wish they would show some awareness of the problems of hubris (Bernanke’s “We will not stand down” certainly comes to mind).
Mr. Kline,
I’m with you there, but I think with globalization, there will be a modification of the social matrix.
Re: “There are actually periodicities to the circulation of the ‘center of opinion’ as it shifts around the perspective matrix over the long term, such that at similar periodic moments over the long term societies tend to ‘remember old ideas’ which are latent in the problem space because embedded in the culturem”.
Here is a timeline for affective recurrence:
August 8, 1788
No solution to the financial crisis is found without calling the Estates-General (representing the three orders of Nobles, Clergy, and Commoners), which had not been assembled since 1614.
August 24
Jacques Necker, a Swiss citizen and a Protestant, replaces Lomenie de Brienne with the title of Director General of Finances; he attempts once again to solve the financial crisis and to devise a plan for a successful meeting of the Estates -General.
July through September
Throughout France a poor harvest augurs more hunger and financial difficulties.
The legal analysis Levitin did of the AIG bailout on his blog was flat wrong due to many careless errors. Given that he wasn’t embarrased at how bad it was, I see no reason to trust his analysis on anything.
Levitin said the US government bought less than 80% of AIG’s equity because the so-called earnings stripping rules would apply to deny AIG any interest deductions on its debt.
Levitin said they deny all interest deductions; that is wrong, if applicable, they merely limit interest deductions to a certain amount each year. Levitin said they can apply to limit any interest deductions; that is wrong they can only apply to interest deductions paid to certain tax-exempt “persons” or on debt guaranteed by such “persons”. Levitin said that the US government counted as a tax-exempt person; that is wrong, the tax code doesn’t define “person” to include the US government.
There are lots of similarities with the 1873 panic and the long depression. This involved a hoousing boom, bad investment speculation, financial wizardry, a period of very cheap labour, large wage differences between the rich and poor, a severe credit contraction, and banking authorities that tried massive bailouts. There was no federal reserve then but US treasury and bank of england actions had a familiar look to them. What happened in China and India as a result is also interesting.
“There are lots of similarities with the 1873 panic and the long depression.”
True, it is a much better analogy. That said, the closed end fund boom in the gilded age and bust in the depression has a lot of parallels to the 2000’s boom/bust of hedge funds.
So Steve, actually phoney, overleveraged securities as opposed to securitized bundles of same _were_ a major factor in the speculative bubble of the Twenties; a very similar ‘product’ with a very similar result, only retailed in a manner appropriate for its time.
But what, then, will happen to all that LBO debt fused in ASBs once the real economy now tanks? The underlying companies will throw themselves in to the arms of the Guvmint’s Mother Bailout via Chapter 7, and default on their LBOed bonds. And it couldn’t happen to a more deserving set of usurious vultures: LBO debt is a total cancer on the economy, it should be illegal to takeover a profitable concern to then gut it financially by loading it with debt and absconding with the funds.
So doc holiday, 1783-4: that’s in W Europe, different oscillatory structure, with a different perspective matrix. There, you will find, for one instance, a long-running sequence of socialist-leaning near- or actual insurrections, a sequence which is attenuating into something else now that the landed aristocracy is trivially marginalized, and individual sovereignties are waning and the real socio-political context is shifting.
So Anon, the structural parallels with the Crash of 1873 are very good, yes. The period afterwards was called ‘the Great Depression of the 1880s,’ though it didn’t have a patch on the Depression of the 1830s, a real land boom bank buster. The post-1873 sequence his is what we would have seen in 1993 or thereabouts except for Alan Greenspin’s malfeasance in blowing bigger bubbles out of the Fed’s backdoor. We would be in line, now, for something like the Crash of 1896, but will get something more like 1873 and 1896 the two put together. Again, historical parallels are inexact, but closely comparable situations will tend to recurr, the heightened income disparity of c. 1890 for example, and the feckless pro-capitalist bias of both major political parties (which is why both the Socialists and the IWW became significant forces). As you see, we are not repeating the prior instance closely, but both instances fit a common category.
Have to say this: you Americans always think you’re the middle of the universe, you talk about globalization, but it really only means Americanization for you. The fact is, there has been a global financial system since the 17th century, dominated but not completely controlled by the Spanish and the Portuguese, then by the Dutch, then by the British and then and until now by the Americans.
Just very occasionally, this whole system goes bananas. Last time in the 1930s the British were badly losing control, but the Americans weren’t yet ready to run the show. So the whole world went kerbang, world trade dropped by two thirds (not the rate of growth, actual trade) and we had the Great Depression. But it was a global depression, not just an American depression. Nobody is really sure where it “started”, but actually in an unbalanced system that is a silly question – like asking where a thunderstorm started.
So what’s now, in the new global crisis? There is ABSOLUTELY NO comparison between the situation of America (I mean USA) in the 1930s and now. (1) America was a lender/creditor in the 1920s and later in the 30s, America is now and has been for several years a borrower/debtor. That’s BIG. (2) America was on the cusp of taking over global leadership in the 30s, now it is on the cusp of losing global leadership. And once again there is no-one to take over.
Now a question: America was certainly the worst hit by the Great Depression. Will it be this time (I mean if there is really another depression or something like it)? Or could it be that the worst hit will be somewhere else – perhaps those whose economies are so dependent on vendor-financed sales to America on the back of artificially low currencies (especially China but not just China)?
“America was certainly the worst hit by the Great Depression. Will it be this time (I mean if there is really another depression or something like it)? Or could it be that the worst hit will be somewhere else – perhaps those whose economies are so dependent on vendor-financed sales to America on the back of artificially low currencies (especially China but not just China)?”
GMO thinks China and the other cheap currency mercantilists will sufffer worst.
@Anon 7:55 a.m.
“you Americans always think you’re the middle of the universe”
You’re writing about me, aren’t you?
When I was little, my Mommy (I’m an only child) got a big balloon and blew it up for me. She took a black marker, and drew a small circle, right on the surface of the balloon.
Then she said, “Look at the mark, Eddie-Paul. [For some reason she always called me by both my first AND middle names.] No matter how I rotate this big circular balloon, you are always at the center. Everything is centered around you, Eddie-Paul. Everything.”
Are you telling me, Anon @7:55 that my Mommy was lying to her little Eddie-Paul? Are you telling me that I am NOT at the center of it all?
To Yves. No need to write any more posts today. I’ll be busy pondering this universe-shattering news, so I won’t be checking into Naked Cap—which I know you write for me.
You DO write this site for me, don’t you? I’m starting to get a complex.
There might be an argument to be made that US financing of debt and oil are analogous to German reparations payments prior to the Moratorium of 1933. And that US credits for food products and other purchases compare with current Chinese or Saudi support for the US.
Since “financial systems” are tied up with military power as well as reserve currencies and denomination indebtedness, the comparison won’t go too far because the dollar is still the reserve currency and numeraire for credit extension and the US military is still deployed in more than 100 countries around the world. There is no comparison to the Reichsmark or Reichswehr.
Under Bush 2.0, especially since the Spring of 2002, the financial system has seemed to have been organized into a series of one-way bets, mainly thanks to Greenspan. There were: the yen carry trade to higher yielding currencies. ($1.2 trillion in 2007); the falling dollar; the rising oil price; the rising gold price price (prices of gold and oil quadrupled in dollar terms between 2002 and 2007; The role of the German Pfandbrief and related hard asset-backed securities in the Yen Carry Trade and international “wholesale” underwriting of US mortgage finance as longer term asset-backed collateral secured, temporarily original issue of Libor and Fed Funds indexed Arms;
prices of US Treasuries (?); Dollar origin investment in foreign equities to benefit from currency translation effects.
There are probably more of these one way bets. Considering this list it is quite easy to argue against any case for Wall St. Bonuses representing much skill other than being in the right place at the right time.
All of the “bets” identified could be “hedged” against each other, or chained to each other, in order to magnify the one-way bet.
Perhaps the reversal of these one way “smart money investment opportunities” over the last few months is what has contributed to the constipation in what are called money markets, typified by the near $400 trillion of interest rate swaps etc.
If that is the case it is difficult to see how the money markets could really be unclogged without a new series of one way bets comparable in power to the ones which characterized the five or six years from the Spring of 2002. People probably know the turn over numbers required to do that.
There appear to be between $1 and $2 trillion worth of medium term type investments under discussion between major countries of Eurasia in oil and gas pipelines, railroad infrastructure (passenger and freight), electricity supply, and the related kinds of capital goods. The effects of such direct investment would be ten times or more the nominal input. US money managers tend to ridicule these perspectives as unreal on price and fundamental demand terms. Others see them as organizing a bridge or pathway into the future, even without the dollar, for settlement of dollar claims and payments has become almost impossible. This approach would be another difference from the thirties, and would be directly related to the unwinding of dollar based credit and pricing structures.
THe unwinding of the leverage built up during the past 5-6 years constitutes another difference with the 30’s, although we may again be clobbered by a collapse of real estate investments and foreign borrowing by newly independent Eastern European countries, as we appear to relive a repeat of the Krediet Anstalt collapse.
In this context I would agree with Richard Kline on slow moving change but argue that while the scale of the problem and the variety of moving parts might seem to require international negotiated approaches and openness to new thinking, what is more likely to prevail is the dumb-ass prejudice of national egoisms. But not in a repeat of Smoot-Hawley.
The blogsophere has been so myopic lately (together with the powers that be and the corporate media) about restoring INTERBANK LENDING, as if that was going to be some kind of cure all.
Far from it. Not even close.
As the article Yves posted points out, it is a long, long way back to the point where lending to Joe the Plumber actually occurs.
And the media hype and blogosphere hype about the joys of bank recapitalization are similarly misplaced.
Recapitalizing banks is a DRAMATICALLY moving target; what is likely is that the latest 125 billion injection into the Big 9 will be gone by January as a combination of issuance of standby letters of credit, further “surprises” in capital losses and degradation of stock price all contribute to a demand for more milk from the taxpayers.
That money is down the tubes, in all likelihood.
Throwing money at the hyperleveraged rathole that is the banking system is a FAR CRY from actual lending occurring to the real economy.
Hyperinflation doesn’t fare very well in a deep, deep recession.
Look at the price of gold.
Matt Dubuque
NOSPAMmdubuque@yahoo.com
The internet is wonderful. It permits anyone with a keyword to do crackerbarrel analysis and draw “amazing parallels” to some tidbit of history.
This most important conclusion I draw from this thread is that the education system has failed miserably.
So what’s now, in the new global crisis? There is ABSOLUTELY NO comparison between the situation of America (I mean USA) in the 1930s and now.
I’ve wondered if in some ways will China play a similar role? The rising economy with strong production, etc., found to have way too much industrial capacity…
Also, will the the replacement of the dollar be by the Euro, or the Yuan? Maybe not for 10-20 years, but there;’s a good chance it will be the Yuan.
“The internet is wonderful. It permits anyone with a keyword to do crackerbarrel analysis and draw “amazing parallels” to some tidbit of history. This most important conclusion I draw from this thread is that the education system has failed miserably.”
No doubt, it is terrible that professors like Levitin talk outside their circle of competence, to pollute the minds of the young. He knows bankruptcy law, and when he talks about other things, all he does is show he is ignorant. This is typical of law school professors, though. Not sure why they think they’re competent with anything other than law.
I’m pretty sure it’s everyone else but me who is incompetent. For instance, what have law school professors accomplished? It’s so easy to become one, a classic case of teaching because one cannot accomplish anything in the real world.
Thankfully, I’m competent in everything. That’s why I spend my time commenting on blogs; there are no challenges anywhere else nowadays.
**No doubt, it is terrible that professors like Levitin talk outside their circle of competence.**
It’s not Levitin’s fault he’s had mistakes in every post that Yves linked to. He’s a baby lawyer with 3 years experience. I’ve never seen a lawyer with less than 8 or 10 years experience that I’d trust to operate independently, and even then, you’d want a senior partner supervising them. Except as a potential way to trick a representative of a firm into signing off on something they shouldn’t.
This entire thread has become infantile, and as such, I look forward to more drivel and economic babytalk!
This entire thread has become infantile, and as such, I look forward to more drivel and economic babytalk!
In terms of what will follow the dollar as the world’s reserve currency, it looks like, concurrent with Volcker’s arrival in Asia, that the Asian Currency Unit (the ACU) is being revived as a distinct possibility.
One can easily envision scenarios seven years from now, if current trends continue, where various sovereigns would be clamoring to be permitted inside the ACU regime, assuming they meet certain “conditionalities” such as a commitment to Asian traditions of educational competence, a social safety net for seniors, lower leverage ratios and higher savings rates, etc.
What they are describing in Asia (and Europe) as the rise of “moral capitalism”.
Matt Dubuque
NOSPAMmdubuque@yahoo.com
I believe the results will be much worse than the 1930’s based on past history and present trends. A noose has been ever so quietly and gently lain around the neck of free market capitalism and this could be the kick of the stool. See my article for details “Barreling Towards Babylon” at my Templestream Blogspot site.
I went off on a 5 second search for parallels related to financial leverage, and this popped up as a path which I may follow at a later day:
> The Second Great Depression?
http://www.minyanville.com/articles/Bernanke-Paulson-Fed-Credit-crunch-recession/index/a/19357
The psychology of this country has begun to change from conspicuous consumption to forced liquidation and saving. The most recent flow of funds data shows that total credit market debt is $51 trillion; our GDP is $14.3 trillion. Debt as a percentage of GDP is now 356%; during the Great Depression, it was 260%. This massive buildup of leverage is just beginning to unwind; the pain will be tremendous when it gains momentum.
According to the Austrian School of Economics, the Great Depression was mainly caused by the expansion of the money supply by the Federal Reserve in the 1920s, leading to an unsustainable credit driven boom. Both Friedrich Hayek and Ludwig von Mises predicted an economic collapse in early 1929. In the Austrian view, it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods.
Trying to inflate a bubble bigger than the last bubble can be problematic when the bubble is becoming larger than you are hence the term ‘planet killer’ or ponzi scheme on a global scale.
Discounting all the pain and suffering about to occur, watching China handle our (US) debt loads is going to be very telling. I didn’t think it was possible to be capitalistic and engage isolationism at the same time.
Reminds me of North Korea as they counterfeit US dollar denominations instead of bombing them into oblivion they’ll end up getting most-favored-nation status.
I wouldn’t get to excited in the deflation camp, wait until after the elections. Try to buy a Krugerrand lately? If you find one, how much over spot will it cost?
What ever happened to the free markets?
11:54 (and all the other Yves/Levitin bashing comments):
Richard Kline, who in my book and I assume that of many readers has an impressive command of history and is frighteningly well read, thinks Levitin made some interesting observations. His post wasn’t intended to be serious or exhausutive (the title “Curious Parallels” makes that clear).
So I don’t see anything terribly wrong with Levitin’s post or Yves’ use of it, but you go off foaming at the mouth about it. You then assert that everything Yves have ever linked to by Levitin is wrong, and mention his AIG analysis, which Yves did NOT link to.
It is pretty evident you did not bother searching Yves’ past posts. I did, I will admit not exhaustively, but the ones I found were useful and I saw nothing wrong with Levitin’s commentary.
So it seems you like to engage in drive-by character assassination. Is this because Levitin and Credit Slips in general has been highly critical of credit card companies and payday lenders? Your degree of venom suggests you have a personal stake in this matter. Or maybe you got a bad grade from Levitin.
Richard,
The offensiveness of bailing the bankers out before everyone else is that it is a mechanism to ever-widening gulf of the haves and have-nots. Since financial firms are made whole first, they benefit before everyone else. Those closest to the treasury trough are recapped first, so that when the reflationary cycle kicks in with its lag, the ones furthest removed from the trough suffer the consequences of inflationary pressures the most.
And so the addictive cycle repeats itself over and again.
yves,
The 5% dividend was reduced to 4% and then to 3.5% under the RFC.
Kudos to you, doc holiday, for making the CERN/FINANCIAL connection. I thought of this right away when the CERN event occurred as being disturbingly similar to the Financial havoc wreaked by “experts” like, Greenspan, Bernanke, Brown, Bush, Paulson, etc. Frankly, I don’t believe the CERN cover anymore then FED/TREASURY BS.
So, technocrats run the Financial System and have completely failed to deliver, except to themselves and their cronies. So, is the same true of CERN and our other Techno Marvels, like Nanotechnology and Biotechnology, to name only two? Do these Tech activities contain the means of our self destruction orchestrated by Technical “experts”, the only ones who know their own Technology and the ones on which we MUST rely for information about their Technology.
Anyway, Bill Joy, one of the founders of SUN MICROSYSTEMS and a TECH GUY, expounds on our TECHNO perils in a very convincing and well thought out essay at
http://www.wired.com/wired/archive/8.04/joy.html
Folks are really missing the boat when they ignore the input Computer Technology has had in the creation of the current Disaster. For starters, should we really have thousands of desktop supercomputers (by standards of ten years ago) whirring around trading willy nilly and causing financial havoc? I sure would like to hear Bill Joy comment on the similarities between our current Financial disaster and other tech disasters.
Steve,
Good point about the consumer being 70% of GDP today. Don’t know what the consumer representation of GDP was in the Depression, but if significantly lower, that will likely worsen things for us.
The consumer is years from being recapped and re-employed, so, the drag on GDP will be substantial. The only way to make up for this in Government spending on infrastructure and energy grids.
But I am afraid Richard Kline is right, Fraudulent loans of every imaginable type were originated in the 1920’s. These were intended to deceive and rip the life-savings out of mainstream america. I might add, the program was immensely successful on a broad and massive scale.
See Bernard Reis “False Security, Betrayal of the American INvestor.”
anon,
Now a question: America was certainly the worst hit by the Great Depression. Will it be this time (I mean if there is really another depression or something like it)? Or could it be that the worst hit will be somewhere else – perhaps those whose economies are so dependent on vendor-financed sales to America on the back of artificially low currencies (especially China but not just China)?
Yes, U.S. platform (GaveKal) companies that make nothing and distribute everything have exported the low margin manufacturing of our economy to emerging markets.
In so doing, we have exported the a large portion of the ills associated with the bust element of the business cycle. That is,countries like China suffer the worst unemployment effects in an economic downturn. That is why I saw accelerating unemployment in China being featured on mainstream tv today.
Matt D,
Nice distinction between recapping the Big 9 being a “far cry” actually lending in the real economy.
It is the age old problem of “getting there from here.” recapping the banks simply doesn’t translate to lending in the real economy. The mechanism does not work like a light switch you flip on and off. And so those most hurt by the egregious practices of our financial system will be the ones to suffer the most and the longest.
doc,
Your austrian explanation of the great depression is overly simplistic in attributing causation
Wallerstein, 10/15/08:
‘The depression has started.’
http://www.binghamton.edu/fbc/243en.htm
Anonymous @ 4:01 PM:
I utterly disagree with you. The US financial industry is certainly humanity’s greatest achievement, and brings everyday countless benefits to every human being.
How dare you compare it with the massive fraud that is CERN’s LHC, a project which only goal is to bring ultimate doom to the human race!?
Yah Know,
It doesn't take the intellect of a rocket scientist to see the difference in stock valuations before and after they turned on that Large Hadron Collider, @ 4:27 A.M, September 10.
Just look right here, The Dow closed on Sept 9th @ 11,230 and then, the Collider goes haywire and then explodes, and now here we are today @ 8852.
Only idiots would stand back and ignore the physical reality of that chaos.
Let's review what that machine is supposed to be doing — "in theory".
It is theorized that the collider will produce the elusive Higgs boson, the last unobserved particle among those predicted by the Standard Model.
The Higgs boson is a hypothetical massive scalar elementary particle predicted to exist by the Standard Model of particle physics.
The upcoming experiments at the Large Hadron Collider have sparked fears among the public that the LHC particle collisions might produce doomsday phenomena, including dangerous microscopic black holes and strange matter.
> Is anyone thinking what I am, i.e, the uncanny correlation between The Large Hadron Collider and The Emergency Economic Stabilization Act? I swear to God, I have seen lots and lots of strange matter in the last month, starting with Treasury yields going to zero, a retarded bailout plan that failed and then was pushed into law, without any details, stocks crashing, banks crashing, systemic financial collapse and insane politics — all in the course of a month …. right, I'm not buying this and everyone knows, this is because of that damn machine — and now they wanna turn it back on next spring? How bout No!
There is theory two, i.e, what if someone like Dr. Evil was holding The World for ransom, for $777 Billion dollars — and if we don't collectively pay, he turns on The Large Hadron Collider again, only this time, on full bast!
Mooohawhahahahaha
john bougearel,
Good point about the consumer being 70% of GDP today. Don’t know what the consumer representation of GDP was in the Depression, but if significantly lower, that will likely worsen things for us.
Economically and socially the USA in the 1930s was much more like China is today. Consumer and services in the USA in the 1930s were about 30%. Agriculture and industry were around 70%.
The consumer is years from being recapped and re-employed, so, the drag on GDP will be substantial. The only way to make up for this in Government spending on infrastructure and energy grids.
A focus on rebuilding a real energy and fuels production would offer real hope of first reemploying the “consumer” in better than Wal-Mart jobs. And then “recapitalizing” the same consumer through radically reduced fuel and energy costs.
I don’t see the least chance of this occuring in reality on a country-wide scale. It would require according real engineers and hard sciences scientists much greater primacy in the economy and government. The days of twits like Kathleen Ligocki and Carly Fiorina running major corporations would be over.
The Second Coming of Obama (i.e. the same liberal arts – law school Ivy League media-financial geek elites that have created this mess) will opt for an ANC South African style government first. That is, something that arbitrages shortages rather than creating genuine values. It’s something within their extremely low technical capacity and is a far more certain method of perpetuating their own power and wealth. And behind the vast fog of feel good words that’s all they’re out for.
@DD said “When I was little, my Mommy (I’m an only child) got a big balloon and blew it up for me. She took a black marker, and drew a small circle, right on the surface of the balloon.
Then she said, “Look at the mark, Eddie-Paul. [For some reason she always called me by both my first AND middle names.] No matter how I rotate this big circular balloon, you are always at the center. Everything is centered around you, Eddie-Paul. Everything….”
I think you’ll enjoy this Opus strip.
Center of the universe
==========================
So John Bougearel, I’m sure that stakeholders in major capital concentrations in the US actively work to maintain their position in the US economy, which inherently means tying capital flows back into their nodal chokepoints. In that sense at least, they are ‘directing the crisis’ to replenish and if possible augment their prior advantage. To me, though, the real drivers are not within the overt actions of individual capitalist concerns to promote themselves. Rather, once a ‘structure’ is established, it tends to replicate _itself_. The specific identity and immediate purposes of whose occupying advantageous nodes matter not; what matters is that advantageous nodes remain such because of the overall system of flows and influences. [Note: I dislike the term ‘structure’ which comes with an immensity of baggage, but for simplicity’s sake I’ll use it here.]
In the US, private capital has alwasy been institutionally strong and well-insulated from state control, public financial authority historically structurally weak and beholden to private markets. There are robust social expectations that this be so. The legal system gives large private capital concentrations very significant protections; not as much as in, say your average feudal society, but far more than in most industrialized nation-states which have much more centralized authority structures. Until the Great War, the Federal Government was pitifully under-capitalized, deliberately so. Until the Federal Reserve Act, there was not even any quasi-public financial authority in the US capable of talking back to the capital markets. Even then, the Fed was specifically designed so as to be insulated from the Executive and Congress. And lest y’all think I’m totally anti-capitalist, I’ll say that at the time and for most of the 20th Century, the insulation of the Fed was the right idea, since Congress had and still has a long history of milking public funding sources for self-dealing constitutencies. And would anyone out there want Harding or Dubya running the Fed, too? Naw; Paulson is plenty bad enough.
In that context, whenever major private capital craps out in the US, the _system_ still expects and needs private capitalists to act at the pivot points of credit creation and market making. Middie Pigs get bigger, and Shaved Pigs get Guvmint help; or we start a war some anywhere and steer the profit opportunities to the Big Boys. That’s an over-simplification, obviously, but you get my drift. The _system_ of nodes and flows reconstitutes itself even if flows go dry here or nodes short out there.
Consider by way of contrast, for example, if the US instead of giving money away to the Big Boys as of 2008 (or more likely in addition to doing so) created a local-economy scale system of non-profit credit unions to lend to individuals and very small businesses at favorable rates with higher guarantees. Supposing that we took out our smaller limit but better rate credit cards with them; kept our pension flows with their conservative and well-secured funds; kept our basic deposits there; took out small consumer loans that we were good for or slightly less small business loans we had collateral for there. Because non-profits aren’t in the dividend business, their flow economies are different, especially if the government is behind them so long as they fly right. Bigger businesses, or larger fortunes could look to the typical capital markets for their opportunities, and good luck to ’em. That would create a real alternative to the system as we have it, and structurally alter nodes and flows.
—And indeed this is what the Savings and Loan industry and the original Fannie Mae were designed to do, more or less: provide low cost loans to the base economy. And it is not entirely a coincidence that during the period when the latter two institutions and others of similar design flourished with government support the US had the best economic period in its history with the least income inequality. —But then the Big Boys bought enough pols to spread the lies around, and one political party entire to push a political ‘arson for profit’ of semi-public finance, and gutted the lot. And the public stood around and said, well this looks familiar so I’ll wait and see, because SOCIALLY the public had not learned to think differently and to see a redesign of the financial flows as A Significant Thing in their interest. And we see the outcome: the system reconstituted itself. This involved deliberate political chicanery, yes, but also considerable sociopolitical ‘muscle memory’ if you will that resettled back into the long-term configuration of its ideas and institutions.
Break the frame; break the frame, to break the system. See the nodes and flows for what they are; see their stakeholders for WHO they are—and act outside them if and when you can. And build new nodes and new flows. Or we just get to live it time and again. The faces change but the song and the drunktank stay the same; and the money judges, and the jailers.
So Anon of 12:14, you have a good point regarding agriculture in the US. In 1930, it was so much more important than it is now few of us can grasp the scale of the difference. I can assert without even going back to look up the numbers that in 1930 agriculture was the largest single employment modality in the US; in 2008 it’s almost trivial, although the economic value it generates is not. In this respect and others, the US is _itself_ somewhat different in its internal economic order in 2008 than it was in 1930, yes, as another Anon remarked above. The global economy is _not_ so very different, coming back to the perspective of still another commentor. Here, too, there are nodes, roles, and scales, amongst which players shift but even as the structural relationships _within the system_ remain far more enduring. As of 2008, the structural position of the US is quite closely comparable to that of the UK and its empire as of 1930 or there about. Think about it; I have, and I’m not the only one.
Here are a few parallels to consider; I did a study on this, which I’m not going to break out. Both polities had declining industrial bases; the reasons vary slightly but the result is the same. Both were overextened geopolitically, with militaries far too small to control what they occupied and claimed but unsustainibly expensive to continue. They had the dominant currency but this depended upon a lot of capital churn, as their respective financial centers were ever less invested in productive enterprises as oppposed to money rent and trade finance. Both had declining educational systems in both the depth and breadth of result, not only in relation to other polities but to their own recent standards. Both retained significant leadership in basic science, but in both cases this is somewhat deceptive since much of this was conducted by immigrants to the home country drawn by opportunity. The leadership caste in both polities was backward looking, and poorly engaged with the structural changes in the global economy. Both locations had significant fiscal imbalances—they taxed too little to meet their goals, and taxed the wrong parts of the citizenry excessively. Both resorted to jingoism to buy off the media and the petite bourgeosie. And so on. The structural situations are highly comparable. Take a look at how it ended for _them_, and you have the first standard deviation probability of how it will end for us. This isn’t certainy, I make no such claim, but something close to it is more likely than not. We should be so lucky.
So Juan, thanks for the tip on Wallerstein’s current perspective; I’ll have to look in over thataway. I’ve always had a lot of respect for the depth of his geo-economic knowledge. It was my regret that my models, in the end, simply clashed irreconcilably with his fundamental interpretation. That was the reason why I didn’t apply to his program at SUNY-Binghampton when he was still active there, I didn’t see them accepting me, which has been either the biggest mistake of my life or not, depending on Where I Go from Here.
Yves,
Am late to this fight, but the comic pomposity and vacuousness of his comments leads me to think that troll above is the Sarah Palin fanboy that I snarled at (rather pointlessly) a week or two back.
Perhaps it is uaeful to have him around as light relief, and as a textbook example of how not to think stright.
…his typing’s better than mine, too
Richard Kline,
So Anon of 12:14, you have a good point regarding agriculture in the US. In 1930, it was so much more important than it is now few of us can grasp the scale of the difference. I can assert without even going back to look up the numbers that in 1930 agriculture was the largest single employment modality in the US; in 2008 it’s almost trivial, although the economic value it generates is not.
This is broadly true. It was more important for employment in the 1930s. And the employees were better off than today’s urban underclass/proletariat. The economic value of “industrial agriculture” today is far greater than the labor intensive agriculture of the 1930s. There’s another powerful factor at work. In the 1920s-1930s farm incomes were steadily falling. The reason was the internal combustion engine.
In 1915 the population of the US was 100 million people. And 20 million horses and mules that powered “local transportation” and farm equipment. A horse eats roughly 5 times as much as a human. We can see the result of sending Ol’ Dobbins to the glue factory and replacing him with trucks and tractors. Henry Ford was acutely aware of the source of the farm crisis. That’s he started his “biocar” project that he unveiled in August, 1941.
Overall farm incomes are rising and the farm is resuming its importance in the areas of fuel and materials production.
As of 2008, the structural position of the US is quite closely comparable to that of the UK and its empire as of 1930 or there about. Think about it; I have, and I’m not the only one.
I have too and I almost made the same observation. AJP Taylor’s “English History 1914-1945” has some instructive sections on this topic.
with militaries far too small to control what they occupied and claimed but unsustainibly expensive to continue.
This parallel however is inapplicable. It's the result of believing endlessly repeated mass media lines. Hyper-power continues in this field. The US Navy (tonnage > next 17 navies) and the US Air Force (well into deploying 5th Generation technology combat aircraft, alone) overmatch any possible combination of opponents. This was not true of British forces in the 1930s.
Nor has the USA made any truly great ground effort in either Iraq or Afghanistan. Both are definitely splendid little colonial wars, although not so splendid if you're one of the casualties.
doc: "The problem, the report concludes, arose because of a faulty electrical connection between two magnets, which led to mechanical problems."
really think you're onto something with this tangent doc.
here's some Baudrillard to take it a little further down the path:
"Any system for itself a principle of equilibrium, exchange and value, causality and purpose, which plays on fixed oppositions: good & evil, true & false, sign & referent, subject & object. This is whole space of difference which, as long as it functions, ensures the stability and dialectical movement of the whole. Up to this point, all is well. It is when this bipolar relationship breaks down, when the system short-circuits itself, that it generates it own critical mass, and veers off exponentially"
note: the particular system in which he is discussing there is the economic system.
he wrote this in 2001.
also, Terrence McKenna postulated that the technosphere is the bridge between the biosphere and the noosphere.
if we agree to agree with him, perhaps technology is playing the role of the trickster here and now.
or perhaps rather that a trickster has gotten inside technology causing it to short-circuit?
a magnetic imbalance for instance?
http://science.nasa.gov/headlines/y2003/29dec_magneticfield.htm
i love the last line on this page:
“Sometimes, maybe, a little change can be a good thing.”
luther,
Your on it there, thanks; these threads never die (in theory) so it is interesting to think about these abstract connections!
This has me going: "In common with many poststructuralists, his arguments consistently draw upon the notion that signification and meaning are both only understandable in terms of how particular words or "signs" interrelate. Baudrillard thought, as many post-structuralists did, that meaning is brought about through systems of signs working together.
Accordingly, Baudrillard argued that the excess of signs and of meaning in late 20th century "global" society had caused (quite paradoxically) an effacement of reality.
Critiques of Baudrillard
Denis Dutton, founder of Philosophy & Literature's "Bad Writing Contest" — which listed examples of the kind of willfully obscurantist prose for which Baudrillard was frequently criticised — had the following to say:
Some writers in their manner and stance intentionally provoke challenge and criticism from their readers. Others just invite you to think. Baudrillard's hyperprose demands only that you grunt wide-eyed or bewildered assent. He yearns to have intellectual influence, but must fend off any serious analysis of his own writing, remaining free to leap from one bombastic assertion to the next, no matter how brazen. Your place is simply to buy his books, adopt his jargon, and drop his name wherever possible.
LOL, people are cruel!
I enjoyed the page from NASA also, thanks:
Before mathematicians tackle a complex problem, they try out simple solutions (joke about a mathematician's model of milk production: "Assume a spherical cow of radius R, uniformly filled with milk… "). No such luck here: early in the game, in 1934, Thomas G. Cowling in England proved that any self-sustaining dynamo in the Earth's core cannot have an axis of symmetry.
Luther,
‘The bipolar relationship’ is never balanced but a tension driven unity in motion; think of, for example, quantity and quality.
Richard,
After reading your above, it seems our perspectives are not so distinct as I’d imagined.
So Anon of 9:56, I broadly agree with your remarks concerning change vectors in US agriculture in the 1920-40 period. A further point which you don’t make explicit there, but which supports your contention, is that internal combustion is what made agribusiness corporations really viable because of the scale economies the machines and the organizations together allowed. And _that_ factor alone has made for massive changes in the relationship of agriculture to the broader US economy, and undermined the structural place of owner-owned farms, whose operators found it very difficult to access the capital required to keep pace and scale up over the long term.
A separate issue which you don’t mention, however, and one relevant is that during the 1880-1920 period a very large acreage of agriculturally marginal land was brought under cultivation in the US, for social reasons. That pushed output up to levels which periodically crashed prices, but at the same time the productivity of these areas was literally eroding rapidly by the middle 1920s. Marginal farmers were dragging everyone down with them through overcapacity. Internal combustion just served to drive them off the land en masse rather than over several decades. Much of the ‘Angry White Vote’ in the US are second and third generation descendants of busted out farmers, still bent on finding someone to blame for their loss. The social impacts of this process can’t be easily assessed, but they are non-trivial in present US sociopolitics. Real property bubbles have been an intrinsic social and political enterprise of _that_ community, I may say (if not them alone). The inability of the US political space to engage this demographic in different goals is a significant factor in our inability to adapt as a country to the changing global economic context. I’m not blaming them; at the same time, fairmindedness doesn’t make this problem go away.
I have, most regrettably, never had the time to read AJP Taylor in any detail, though I’m superficially familiar with his thought. I’ll bear that text in mind as a place to start, book number 51 in the To Read list on my futon.
Regarding your last point, however, I strongly disagree. Hyperpower is a _fiction_. Yes, really. You do choose the best possible modality to make the case, I’ll say that; the US Navy is vastly larger and more effective than any comparable combination of forces today. And you are assuredly right that the UK never had a similar force advantage at any time, or perhaps only during the 1805-20 period. So what? What does that win us. Is the the US Navy capable of defeating China? No; absurd. Capable of defeating Turkey? Israel? Is the US Navy capable of defeating Iraq? No. The Taliban? I think we would agree again no. I would submit that if the US Navy seriously engaged _Iran_, it would suffer severe and irreplaceable losses; close run action, but there have been more than one war game that yield that results, and I am sure that the US CNO understands this very well. The US Navy means that no state actor can interdict international sea lanes counter to the wishes of the US government, but it is insufficient alone to project force in a decisive manner. There is a long argument to that, with good points on your side I haven’t delved into, but I submit that assessing the standing of the US Navy of 2008 we have to look at the global strategic context.
What then of the supremacy of US airpower? This is much more effective at force projection, yes. One might even be able to make the case that very few state actors in history have possessed a single military assembly with such short-term punch and effectiveness as US air as of 2008. What does it really mean _in context_ though? US air has not contested any serious industrialize military technocracy, so we don’t really know. US air could not sustain any serious loss rate in any real shooting war; this is a major reason why US war plans call for winning very short wars with massive firepower projection, because the air fleet is so expensive and takes so long to replace that it would very likely attrit out in any serious war, leaving the US bolloxed for the two years it would take to replace, if it could be replaced. There are war games on both sides of that contention; I don’t mean to say the issue is closed. For giving a lethal punch to conventional main force units of small countries with no air defenses to speak of, US air is a fabulous weapon and a real gun to the head. We can blackmail most though not all medium sized powers into non-opposition via threats to eviscerate their infrastructure, i.e. collective punishment. That is power; it is not hyperpower. Big states always look unbeatable when they send divisions against poorly armed Third World militias. Until those militias go guerrilla, there’s the rub.
The US ground forces are trivially small. The are unable to control even a single, small, urbanized country, half of whose area is uninhabited. We lack the ground forces to sustain any real shooting war with a credible adversary. Yes, in principal, we could reinstitute the draft, field a much larger military, and win via mass and logistics against many opponents. Socially, that is out of the question outside of a war of survival, and I’m far from convinced that the US public has the stomach for anything like that even so. A hyperpower can project the ground forces to occupy and win, compelling surrender. We lack that. Short of blitzing Panama the US isn’t capable of winning any _enduring_ war with a determined adversary. We can impoverish them, kill them ten to one, and make their lives miserable. Defeat them? No. And if I believed in God, I’d thank God for that.
Consider this, Anon: Russia won in Chechnya. India won in the Punjab. _Sri Lanka_ finally put together a competent strategy, and is going to win against their insurgency. But the US has lost in Iraq and is losing in Afghanistan. Forget the rhetoric, and just keep track of that statement over the next two to four years. The outcome is plain, though the discussion is long enough I won’t go into detail. We have lost because of the delusion that Air and Navy could make up for not enough Army and a miserable strategy compounding a bad strategic matrix. That isn’t a hyperpower. When and as we decide to occupy Pakistan—and I think that is a very real possibility over the next ten years—the results will be far, far worse than we can ever imagine. And not in our favor.
Or consider this, strictly as a hypothetical: The US isn’t going to fight a war with Russia due to nuclear weapons; supposing those aside, how do you think we would do given the comparably weak Russian military as of 2008? Probably, we could eject them form peripheral territory; there is no possibility that we could occupy and defeat them. Cold the US compel surrender as oppose to negotiate compliance with Brazil? Mexico? What’s it worth to them to resist? We have power, yes; hyperpower, no. Can you project that the US could and would occupy any comparable territory to the way France occupied Indochina in the late 19th century? I doubt it, though I’d listen to a case being made.
So Juan, I have never assumed that we had irreconcilable differences of perspective on cycles. Much of what is discussed in the literature I agree with, but I have different models for _how and why_ the effects we observe occur. The observed effects though, certainly on a national scale for example, are what they are, and here I think we often have a similar view insofar as I have followed your discussions over time here.
Richard, I meant, but did not say, that we may simply be using different terms for the same ‘thing’, e.g., once a ‘structure’ is established, it tends to replicate _itself_. = society’s reproduction of itself takes place on the basis of historically specific social relations such as private ownership and wage labor. These relations become so internalized (and institutionalized) as to constitute the “frame” you refer to above — but reproduction on an expanding basis also generates increasingly sharp contradictions from which arise _still-within-the box_ changes in form.
Old questions then of ultimate global limits but, as you imply, breaking the frame requires some recognition (consciousness) that such a frame even exists.