Vigilant Investor

That’s Jimmy Durante in 1933 during the Great Depression. He was hired by FDR’s National Recovery Administration (NRA) to urge those not wanting to waste their limited resources to willy-nilly hire those without work as a policy to get the economy going. Such inanity completely failed to recognize that the Great Depression was caused precisely because the nations’ finite pool of resources / savings had been so severely misallocated thanks to the vast credit expansion of the 1920s. That expansion gave the impression to entrepreneurs and speculators alike that the economy was on a sustainable growth trajectory, when in fact the fuel driving it was nothing more than the fiction of an expanding money supply. So here we have FDR suggesting folks blow more money on what the economy really doesn’t quite need rather than what it does.

Such rigging of interest rates, and so forth, at the heart of the monetarist policy behind the boom-bust cycle does nothing more than functionally extract wealth from savers and entrepreneurial creators (who back their dollars earned with their own labor, effort, and production) and redirects it to hot-money movers and shakers.

Truly, that situation was not at all different from our current fiasco that’s unfolding related to housing, mortgage, and credit bubbles. Clearly the economy has misallocated hundreds of $ billions — if not $ trillions — into counterproductive business decisions; Too many condos in Miami; easy mortgages for now upside-down flippers across the country; loans to hedge fund managers who failed to comprehend that AAA didn’t mean “liquidity” on subprime backed securities; freshly minted money to the money-shuffling bankers who recklessly extended credit, encouraging it all.

While the mainstream media and analyst continue to focus on the additional costs and moral consequences of a bailout for this massive debacle, very little postmortem thought is given to how all those hundreds of $ billions were yanked from the functioning economy and redirected to unsustainable activity that is collapsing as we write. One can only wonder about the more natural purposes that this vast wealth would have been put into if it had not been redirected into the countless perversions cropping up on the back of the artificially-induced expansion, all of which now sit idle or partially used, and essentially insolvent.

Worse yet, with the cheap drug of easy-credit just only recently withdrawn from the economy (e.g. only rising from mid 2004), you must consider that we are still in the early stages of learning how badly overextended into the non-productive morass the economy has become stuck. While you do, try not to think too much about how all that activity was (and still is) entirely (and even parasitically) dependent on both expanding credit and money supply for its very viability.

While many players on Wall Street know damn well they are in serious trouble, they fail to comprehend that the far deeper problem is not confined only to subprimes and U.S. housing. Most still appear to be at a loss to explain how the minuscule submprime market could become the fugitive contagion that has blindsided the global credit markets into locking, or a how housing downturn — a scant 5% of the economy — could lead the U.S. economy into a recession.

But I have digressed. I started this post off with FDR’s NRA policy to demonstrate how government responses to the problems they create (yes, Congress authorized the Fed and the fraudulent inflationary banking system of the U.S. as it existed then and exists now…) are at best misguided policies. I do so because we are now dealing with government bailout plans of various shapes and sizes for this fiasco, and with election year 2008 looming, we can expect a whole fleet of more! With Congress soon to be facing a stagflationary recession (we’ve been warning you!!!) we can expect a fresh menu of economically illiterate, populist motions to be furiously passed. Will we repeat the vast policy-mistakes made prior and during the Great Depression? If high school and economics class texts, or Ben Bernanke speeches about helicopters are any indications, it’d seem we’re firmly on the road to an even deeper fiasco, one that will rhyme with the Great Depression itself!

Let’s take a look at the bad policies of the Great Depression.

Hoover’s mistakes

Popular wisdom is wrong about Hoover. Ben Bernanke’s now famous research and comments tell that President Hoover’s Fed failed to act with sufficient liquidity, thus enabling the slight bump in the economy in 1929 to collapse into the Great Depression (generally the consensus opinion). But that’s not entirely accurate. Monetary policy was very accommodative as demonstrated by Murray Rothbard in his seminal work, America’s Great Depression. Easy credit breeds dislocation, and Hoover’s actions merely added more stress to an already staggering economy — one that would have been best served by sitting down to take some time to sort things out. Instead, problems were compounded as “good money” was yanked out of savings (via monetary inflation) and thrown after bad. Such actions were the equivalent of treating a patient with the very same pathogen that caused his illness.

Hoover further compounded his mistake with various inefficient command economy concepts. His forced high-wage policy is a good example.
This type of meddling was the last thing the economy needed. The boom of the 1920s had badly distorted the natural price relationships of goods and services, including wages. Hence, as the collapse unfolded through the economy, there was heavy downward pressure on all wages that had been previously driven up into unsustainable territory by credit inflation and the bubble. But, rather than allowing wages to vent-off and recalibrate, Hoover acquiesced to organized labor pressures and Keynesian economic theory, and put forth a policy forcing government contractors to pay a wage well above the natural level. It was that, or lose contracts. [Today such policies are ingrained into our system with assorted minimum wage and pro-labor wage laws.]

Another policy Hoover encouraged was the idea of “share the work,” which encouraged employers to hire more employees than necessary, thus strapping business with more inefficiency. As well, the Smoot Hawley Tariff slapped taxes on foreign made goods further compounded problems. Not only did this increase global tensions that may have lit yet another fuse for World War II, it forced struggling consumers with finite resources to buy domestic-made goods that were less efficiently produced – partially because of policies enacted to help the economy!

FDRs New (raw) Deal —

The New Deal programs are so vast that we can’t critique them all. Instead, I encourage folks to visit Wikkipedia to review the New Deal once they finish reading our post. As you read about the New Deal, review each policy through our critique below of the examples below, like the NRA Blue Eagle Program.

• Blue Eagle Program - The government specified recommended minimum prices for goods and services to all businesses, retail or otherwise, called Blue Eagle prices. Those charging Blue Eagle prices were allowed to post at their shops that they were a Blue Eagle business, while FDR’s public relations machine churned out the message that Blue Eagle businesses were patriotic, and that it was unpatriotic to charge below Blue Eagle prices. FDR even encouraged boycotts of non Blue Eagle businesses during his radio broadcast fireside chats. In other words, it was patriotic to charge struggling consumers more than they could afford. He hired thousands of blue eagle watchdogs to roam the country and ensure Blue Eagle compliance. (Imagine the tales of woe that a grocer might have heard during this time.)
• Potato burning — some farmers were actually required to burn their crop in order to keep them off market. This was intended to keep prices up and ward off deflation. (Sound familiar?!)
• Pigs were destroyed to keep pork prices high. Farmers didn’t care since the government paid them, but the supply of pork being down caused prices to go up. Of course this failed, which begs the question — how many pigs would FDR have had to kill to get the U.S. out of the depression?
• In the south, every third row of cotton was plowed under. Of course, the government paid farmers to do this. (Mules were the primary power source in the south, and had been trained to walk between rows of cotton vs. over them as would be required to plow, leading southern critics of FDR to state that Mules knew more about economic policy than FDR.)

All of this was intended to prevent folks from losing perceived monetary wealth, when in reality, it was quite literally plowing under and killing real wealth which is measured in production.

Compound that sort of thinking exponentially across the entire New Deal, and is it any wonder the bubble break up of 1929-1933 turned into a severe man-made depression?

Not only were problems not allowed to be cleared from the economic deck so that finite resources might put to better use, these errors were sustained and compounded over and again.

Unfortunately, populist thinking today seems all to ready to embrace tariffs on foreign produced goods, price caps or excess profit taxes on energy products, price gouging legislation, and so forth. With the concept of the “nanny state” so much more firmly enshrined into the public context, one can only imagine what sorts of meddling will be enacted to stave off a serious recession or depression!

That said, when it comes to the Great Depression many have been mislead to embrace government meddling and centralized command economics. Of course, we should expect government schools to endorse and promote the idea that “government always knows best,” and that FDR is a hero who saved us with great government ideas. They are, after all, an extension of such thinking.

Unfortunately, economists are frequently equally misinformed, albeit from a Keynesian and monetarist (inflationista) bias that is its own fiction about why the Great Depression was so severe.

Let it suffice that this subject is the stuff of lengthy books and essays. However, in keeping with the theme of criticizing dislocative economic policy, it is appropriate to expose the mythological heroes of yesterday to critical thinking. In such a light, perhaps we can better see the writing on the wall as it pertains to similarly misguided, present day policy as the Great Credit Bubble continues to unwind.

Think it through and remain vigilant!

***
Hat tip to Roger Garrison at Mises.org for his lecture insignts that contributed to some of the examples in this article.

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