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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: NOW who wrote (58287)	4/15/2006 5:01:21 PM
From: CalculatedRisk	Read Replies (4) \| Respond to of 110194

Its sort of amusing ... there are several excellent papers by historians that trace the Depression to the Farm Tractor. But economists tend to narrowly focus on monetary policy (or trade policy). BTW, no one argues the farm tractor was a bad thing (it was a GREAT invention). But policymakers ignored the impact of rapid productivity growth in one sector and declining real wages for a large segment of the population. Also, since there were no safety nets at the time, people close to the edge stopped spending, driving the economy into a downward spiral. Luckily these days we have unemployment insurance and Social Security Insurance - two key safety nets. There were several "nails in the coffin" ... trade barriers, attempts by Hoover to balance the budget (as the economy slumped, tax receipts slumped, so Hoover cut spending - the exact wrong thing to do!), and the FED's tight monetary policy. As Tommaso pointed out, the Treasury Secretary Andrew Mellon was an idiot and wanted to 'liquidate' the problems! "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. ... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." SecTreas, Andrew Mellon The correct policies would have been to cut interest rates rapidly and allow some deficit spending (but probably raise taxes on the higher income earners to pay for some safety nets). This is amusing: In '32, one of FDR's platforms was a balanced budget! Hoover was struggling with deficits because of the Depression and FDR was criticizing him. After FDR was elected, he realized there was no way to immediately balance the budget.