Some Lessons from the Past

Widespread speculation, lack of regulation, and lack of transparency - these were the headlines in 1929. Doesn’t this sound eerily familiar to the present crisis?

In 1929 it was hyped stocks. Today it’s a hyped housing bubble. In 1929 it was the absence of a Securities and Exchange Commission. Today it’s the absence of a competent SEC. The exotic securities that we created in the past decades (MBS, CDOs, CDS) may not have played a role in the crisis of 1929, but the principles are nevertheless the same.

While we may have failed to learn a crucial lesson in preventing future crisis from 1929, what we did learn was how not to aggravate crisis that do occur. I think Milton Friedman, the famed economist of monetarism, sums the crisis of 1929 best:

The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government. —Milton Friedman, Two Lucky People, 233

This time, Ben Bernake, the current Chairman of the Federal Reserve, took more drastic measures and pumped over $800 million. Why did Bernanke take such measures? As we have discussed before, in a nutshell printing more money lowers interest rates, and lower interest rates spur economic expansions – GDP and job growth.

Did the Fed learn its lesson in 1929? It appears so and It’s looking more and more like the current crisis might just be another garden-variety recession. Yes we have high unemployment (though not by historical standards) and the market crashed 50%, but that's still a far cry from what happened in 1929.