13.1.09

GIVE US THAT OLD TIME RELIGION. Northern Illinois public affairs interview historian David Kyvig on the parallels with the Great Depression.
“We’ve learned a lot from the Great Depression, including lessons about the value of government regulation in building confidence in the economy,” Kyvig says. “That was one of the great contributions of the New Deal. As soon as government imposed oversight on banking and stock exchanges, confidence in those institutions began to grow immediately.
Not quite. The Cold War conceit of a "peoples' capitalism" could not stand up against the overwhelming evidence that relatively few people owned common stock, with much of it held by other corporations or by financial houses. The moral hazard that deposit insurance creates for moneylenders only manifested itself in the aftermath of the stagflation provoked by the so-called Great Society.
In recent years,” he adds, “we had lost sight of the fact that government supervision is necessary for a healthy economy.”
Judge for yourself. There are some dissenting arguments nailed to Newmark's Door.
In the 1920s, as in the years preceding the current economic recession, Americans had come to rely on consumer credit. Only a small percentage of people held stock, but with the advent of radio, Americans paid close attention to the ups and downs of the market. They knew fortunes were being made.
I wonder if Public Affairs doesn't oversimplify here. Instruments of credit enable people to make long-term investments, something that was at one time not possible for anyone, and for a long time available only to the soundest of companies. It's speculation to suggest that people would have a greater propensity to borrow against future wealth, if that future wealth is not their own.

As far as the government supervision, perhaps someone could calculate how large a staff the banking commissioner would require to review all the loan applications. The regulatory drag is likely to more than offset the avoided losses. It's possible that the hard-core libertarian argument that self-interested people would be quicker to stop a credit bubble than a regulator could is valid. Alternatively, the hard-core public choice argument that bubbles create temptations to take bribes is also valid. I expect a faculty member at Northern Illinois University would recognize that.

The article suggests the heretics are right.

When Roosevelt comes in and says, ‘The only thing we have to fear is fear itself,’ that has a profound impact,” Kyvig says. “But it doesn’t immediately kick start the economy.

“The psychology starts to improve, but it takes a lot of government regulation and spending to get the private economy moving again, and it won’t be until the beginning of war spending (in 1940) that we get up to the level of production that produces a full-employment economy.

Perhaps the simpler explanation is that the New Deal failed as a macroeconomic policy.

Its aftereffects haunt us today.

Not all New Deal programs were successful, according to the NIU historian. But most did work to jumpstart the economy and calm public fears. The creation of the Federal Deposit Insurance Corporation reassured people about the security of their bank accounts, and the Securities and Exchange Commission provided needed regulation to the stock market.

The Social Security system was established in 1935. And a number of public works programs were launched, the biggest of which was the Works Progress Administration, which put people to work on public infrastructure projects. The National Youth Administration provided part-time work for high school and college students, helping to keep them in school and keeping them from competing for jobs in the full-time workforce. In the long run, it led to a better educated populace.

“Indeed, some of the mechanisms created by FDR are still in place and have even helped to rein in the current economic downturn,” Kyvig says.

That is, the ones that didn't exacerbate it, and the ones, such as deposit insurance and social security, that are huge off-the-income-accounts contingent liabilities. Perhaps it's awareness of these things that contributes to the incoming presidency not trotting out "Happy Days Are Here Again" and all the other trappings of the Roosevelt era.

No comments: