August 24, 2009

REASON ALONE FOR THE CHAIRMAN TO KEEP HIS JOB:

Policy Makers Seek to Learn From 1937's Stalled Comeback (MICHAEL M. PHILLIPS, 8/24/09, WSJ)

The economy was recovering briskly during Franklin D. Roosevelt's first term in the White House. The jobless rate, which had peaked at 25% in 1933, fell to 14% in 1937 -- not exactly cause for celebration but a relief nonetheless.

The comeback stalled in 1937. Banks, nervous about the fragile recovery, were holding huge amounts of cash in reserve at the Fed. Fearing an inflationary surge should the banks decide to lend that money out to businesses and individuals, the Fed -- which had made the mistake of tightening monetary policy soon after the 1929 stock-market crash -- miscalculated again. The Fed ratcheted up banks' reserve requirements three times, starting in 1936. The banks reacted by cutting lending even further.

"There's no doubt that [Fed Chairman Ben] Bernanke is heavily influenced by these two mistakes of the Fed during the Depression and is absolutely intent on not repeating them," says Alex J. Pollock of the American Enterprise Institute, a free-market think tank in Washington.

Compounding the Fed's errors, the federal government tightened fiscal policy. Congress approved a big bonus for World War I veterans in 1936, providing a spark of consumer spending. But lawmakers allowed the subsidy to lapse in 1937. At the same time, the government began collecting the first Social Security taxes, on top of income and capital-gains tax increases that Mr. Roosevelt approved in 1934-35.

Tightening the monetary and fiscal screws sent the economy into free fall again -- the second trough of the W. Unemployment shot up to 19%, prolonging the nation's suffering.


Not only does Ben Bernanke understand better than anyone the danger of deflation, but any replacement would have to demonstrate his inflation-hawk bona fides by hiking rates into the deflation, as Mr. Bernanke himself had to do, causing the recent stall out.

Posted by Orrin Judd at August 24, 2009 6:42 AM
blog comments powered by Disqus
« COMPETITION AS BACK DOOR DEREGULATION: | Main | WOULDN'T IT PROVE...: »