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Boom and Bust
By the Mogambo Guru
Today we come to Federal Reserve Governor Ben Bernanke, who
thinks he is smarter than everybody. This arrogance
probably comes from the fact that he was the top dog in the
economics department of Princeton, where he was molded by
years of him being able to run his fat mouth without
anybody having the guts to tell him that he was full of
crap. Perhaps because he took the wise precaution of
assembling his department out of his own coterie of
lackeys, hangers-on and yes-men.
I cast these rude aspersions on him because this guy, this
Bernanke person, actually said, in a speech entitled
"Money, Gold and the Great Depression" to Washington & Lee
students a mere two weeks ago, that he thinks that the
Depression of 1930's was the result of having a gold
standard! Hahaha! This guy is too much! The Depression was
caused by the gold standard! Hahaha!
Let's let Mr. Bernanke set the scene in Bernanke-world.
"Some [have] argued, for example, that overinvestment and
overbuilding had taken place during the ebullient 1920s,
leading to a crash when the returns on those investments
proved to be less than expected." You can tell by the way
Bernanke says this that he does not believe that
overinvestment and overbuilding are even possible. But when
you look at the data, sure enough, there was a lot of
rampant speculation and borrowing all through the '20's,
all facilitated by the Federal Reserve acting like the
morons that they are and providing the money with which to
engage in that kind of activity.
And the Fed, even today, almost eighty years later, still
does not believe that there is such a thing as overbuilding
or overinvestment, although they DO recognize that there is
excess productive capacity everywhere, which is, according
to them, NOT overbuilding or overinvestment, but is
something else entirely, although they won't say what it
is. And where did all this productive overcapacity come
from? Same as today! From the Fed and the miracle of fiat
currencies in a fractional banking system run amok!
Then Bernanke goes on to announce, in that "I'm so smart
and you're so stupid" way people have when they belabor the
obvious, "Another once-popular theory was that a chronic
problem of 'under-consumption' - the inability of
households to purchase enough goods and services to utilize
the economy's productive capacity - had precipitated the
slump." So we are right back to the same ridiculous Fed-
speak: the economy was suffering because people weren't
buying enough stuff!
And why didn't people buy stuff? Hey! Easy one! I figure
that this is my big chance to show off how smart I am, so
without waiting to be called upon, I happily jump to my
feet and announce "For the same reason that ALL people
don't buy things they want: They didn't have the money!"
And then Bernanke also laments that they didn't buy things
on credit, either. Which the Fed is urging people to do
right now, which translates into those old-timers not going
into debt when they didn't have any money, but us new-
timers ARE going into debt when we don't have any money?
And the lesson is - and notice how I am all scrunched up
over my little desk, pencil poised, ready to write down the
pearl of wisdom that is about to be dropped into my lap -
that if they had borrowed the money, see, just like people
are doing nowadays, then the Great Depression would have
been, and notice by the way my voice quivers in anxious
anticipation, avoided completely?
I swallow - gulp! - and can only manage to say "Wow!" You
mean that a big-shot at the Federal Reserve is saying that
it IS possible to achieve prosperity, and get out of an
impending depression, by going into ever-more debt? You
mean, I can buy lotsa neat stuff, and a real nice house,
with a big 'ol wad of equity in the stock market, and a
bulging 401(k), and jet-skis, and a second home, and fancy
cars, and more, if I keep borrowing until I die? You never
have to pay money back?
But Bernanke doesn't go on to tell you WHY people were not
borrowing like mad to buy SUV's and the like in the late
20's and all the '30's. But I, the MoGu, will give you
three, count' em three, very good reasons why people did
not go into crushing debt to buy SUV's in the late 20's and
all the 1930's: They didn't buy them because 1) they didn't
have the money, and 2) SUV's weren't invented yet, but even
if they HAD been invented, they STILL wouldn't have had the
money to buy them, and 3), they were smarter than we were,
and everybody knew back then that you couldn't have an
economy that was predicated on everybody and everything
going farther and farther into debt. The whole idea seemed
ludicrous. And it is.
Then Bernanke drops what he thinks is some big bombshell or
something. "However, in 1963, Milton Friedman and Anna J.
Schwartz transformed the debate about the Great Depression.
That year saw the publication of their now-classic book, A
Monetary History of the United States, 1867-1960. Friedman
and Schwartz argued that 'the [economic] contraction is in
fact a tragic testimonial to the importance of monetary
forces' (Friedman and Schwartz, 1963, p. 300)."
This ignores the fact that Friedman himself has
subsequently admitted the errors in his strictly monetarist
theory. But this does not deter Bernanke one iota. Maybe he
ain't heard the news, or something. So if you personally
know Milton Friedman, tell him to call Ben at the Fed, as
he is seriously behind in his reading, and would probably
appreciate being brought up to date. Obviously nobody at
his old alma mater is going to tell him.
Bernanke does go on to admit that taxes were raised, but
like all good collectivist yahoos, he doesn't think high
taxes have any deleterious effect of economies, so he
doesn't linger there. He goes on to say that the reason
things went downhill is that the Fed raised interest rates.
He asks: "Why then did the Federal Reserve raise interest
rates in 1928? The principal reason was the Fed's ongoing
concern about speculation on Wall Street. Fed policymakers
drew a sharp distinction between 'productive' (that is,
good) and 'speculative' (bad) uses of credit, and they were
concerned that bank lending to brokers and investors was
fueling a speculative wave in the stock market. When the
Fed's attempts to persuade banks not to lend for
speculative purposes proved ineffective, Fed officials
decided to dissuade lending directly by raising the policy
interest rate." Ergo, the current Greenspan-Fed rationale
for not trying to prick an asset bubble, but merely dealing
with the aftermath.
Now we start getting into the really weird stuff. Bernanke
admits that "the gold standard appeared to be highly
successful from about 1870 to the beginning of World War I
in 1914. During the so-called 'classical' gold standard
period, international trade and capital flows expanded
markedly, and central banks experienced relatively few
problems ensuring that their currencies retained their
legal value." So it worked well! So something happened, he
says, between 1914 and the Depression.
He does not admit, however, that the newly formed Federal
Reserve system, in operation for fifteen short years, had
anything to do with subsequent calamitous economic events.
The simultaneous appearance of these two things were, I
suppose, merely a, you know, huge coincidence or something.
He extrapolates to announce: "Perhaps the most fascinating
discovery arising from researchers' broader international
focus is that the extent to which a country adhered to the
gold standard and the severity of its depression were
closely linked. In particular, the longer that a country
remained committed to gold, the deeper its depression and
the later its recovery." I agree that this is probably
true. Economic distress is the downside of the requirements
that gold places on an economy, which dictate that you NOT
get into an economic mess to start with, because there is
no way out. And a gold standard prevents you from doing the
excessive monetary expansion thing to get inflation
cooking, which is supposed to bail out the debtors. In that
regard, thank God for America being on the gold standard,
or the Great Depression would have been much worse than it
But - and I guess this is the lesson to be learned,
according to Bernanke - countries wherein you could just
fire up the printing presses must have gone on to achieve
lasting prosperity, like the Weimar Republic in Germany or
Then Bernanke asks the Big Question: "What caused the
Depression?" Well, he figures that it is deflation, which
is confusing cause and effect. "Deflation, like inflation,
tends to be closely linked to changes in the national money
supply. While the fact that money, prices, and output all
declined rapidly in the early years of the Depression is
undeniable, the interpretation of that fact has been the
subject of much controversy." Not to me, it hasn't.
Then he gets back to the discredited monetarist approach.
"Friedman and Schwartz emphasized at least four major
errors by U.S. monetary policymakers. The Fed's first grave
mistake, in their view, was the tightening of monetary
policy that began in the spring of 1928 and continued until
the stock market crash of October 1929 (see Hamilton, 1987,
or Bernanke, 2002a, for further discussion)." Note how he
uses himself as a reference!
"The gist of the Friedman and Schwartz argument is that,
for a variety of reasons, monetary policy was unnecessarily
tight, both before the Depression began and during its most
dramatic downward phase. Friedman and Schwartz concluded
therefore that they had found the smoking gun, evidence
that much of the severity of the Great Depression could be
attributed to monetary forces."
This flies in the face of an article by Frank Shostak
entitled, "Does a Falling Money Stock Cause Economic
Depression?" who writes, "However, a close examination of
the historical data shows that contrary to Friedman, the
Fed was extremely loose and pumped reserves into the system
in its attempt to revive the economy (on this see Murray
Rothbard's 'America's Great Depression'). The extent of
monetary injections is depicted by changes in the Fed's
holdings of U.S. government securities. Thus on January
1930 these holdings stood at $485 million. By December 1933
they had jumped to $2,432 million - an increase of 401%.
Moreover, the average yearly rate of monetary injections by
the Fed during this period stood at 98%."
So the Fed was NOT stingy in pumping up the money stock, as
alleged by Bernanke. Mr. Shostak goes on to say, as I go on
to say, as all thinking people go on to say, that earlier
Fed excesses were, in fact, responsible for the Great
Depression. "In addition to this, at some stages monetary
injections were massive. For instance, the yearly rate of
growth of government securities holdings by the Fed jumped
from 19.7% in April 1924 to 608% by November 1924." In half
This bit of evidence garners support for the brilliant
Austrian school of economics insight that, as Mr. Shostak
puts it, "Contrary to popular thinking, depressions are not
caused by tight monetary policies, but are rather the
result of previous loose monetary policies."
In this case, the damnable Fed had spent the entire 20's
goosing up money and credit at a breathtaking pace that was
unheralded in American history. A fact ignored by Mr.
Bernanke, who wants us to focus on the RESPONSE to the
crash and depression, NOT what caused it. And why is he so
myopic about that? Because that is what he is doing right
now! He goosing up money and credit, just like in the 20's!
This very minute!
Bernanke, however, goes on to give us more evidence of his
profound ignorance: "The finding that leaving the gold
standard was the key to recovery from the Great Depression
was certainly confirmed by the U.S. experience. One of the
first actions of President Roosevelt was to eliminate the
constraint on U.S. monetary policy created by the gold
standard, first by allowing the dollar to float and then by
resetting its value at a significantly lower level." In
other words, he says devaluing the currency, hopefully not
to worthlessness, but just this side of worthlessness, is a
So Robert Rubin and all the other Treasury Secretaries up
till now were wrong when they professed a desire for a
strong dollar, that was supposed to be "in the best
interests of America"? Get Rubin on the phone! I'll bet he
wants to hear this!
Currency devaluation might have been thinkable in
1930... but then again, we did not have a current account
balance that is today, even as we speak, over $541 billion
a year! 5% of GDP! A devalued currency is NEVER a good
thing to a nation that imports things. It is a BAD thing to
have a devalued currency if you are a nation that imports
things. We import a lot of things.
By this time Japan, which has been following this
ridiculous Bernanke policy prescription for fourteen years
in a row, should be roaring. It is not. Bernanke does not
explain why. And, in a similar vein, the United States
economy should be roaring along, too, given the record-
setting levels of monetary and fiscal stimulus that have
been pounded into the economy, especially for the last
three years. Three years!
Likewise, the U.S. economy is not roaring at all. The
lessons Bernanke "learned" from the Great Depression have
not resulted in his leading us into greener pastures along
with his fellow partner in crime, Greenspan. Instead, we
are sinking farther and farther into the stinking swamp
that is shown on your maps as the area with the skull-and-
crossbones, labeled "Kiss your debt-besotted butts
The Mogambo Guru
for The Daily Reckoning
Mogambo Sez: In a nutshell, hopefully figuratively and not
literally, we are going to be economically killed, and we
are going to be killed because we are stupid, and we
deserve to die. History is very cruel to stupid countries
full of stupid people doing stupid things.
Editor's note: Richard Daughty is general partner and C.O.O.
for Smith Consultant Group, serving the financial and
medical communities, and the editor of the Mogambo Guru
economic newsletter, an avocational exercise the better to
heap disrespect on those who desperately deserve it.