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Saturday, February 28, 2009

The Forgotten Man

This is my first book review.  This book has had some controversy recently, including some comments at Left in Lowell.

The Forgotten Man:  A New History of the Great Depression
Amity Shlaes
Publisher:  Harper Perennial (May 27, 2008)
Paperback:  512 pages

I have been meaning to blog on this book for about a month, but between one thing and another have not gotten around to it. Since then the global economic crisis has loomed ever larger.

I enjoyed reading the book and about 50 pages from the end put it down for a while, because I realized there were not enough pages left to take this story into the early years of US involvement in World War II, when the US finally really came out of the Great Depression (except for the Stock Market, which took much longer to recover).

The book is not, to me, an economic history so much as a social history and a review of the players in the New Deal, to include their backgrounds.  The author spends a fair amount of time on the main economic alternative, which was the Soviet model.   The Roosevelt Administration's New Deal included leaders who had visited the Soviet Union in the 1920s, to see what was going on.  Mentioned in the books is The New York Times reporter in Moscow, Walter Duranty, who provided the readers of the day with a very positive view of the Soviet Union.  In 1932 his reporting won him a Pulitzer Prize.  Much of what he wrote has since been called into question.

The heart of the book flows from period to period.  Each chapter heading includes the unemployment rate for the period.  None of those numbers are pretty and all are worse than our current unemployment rate, which sits at 7.6%, but will likely be worse when the numbers are released by the Department of Labor early in March.  But, still, likely not as bad as any month during the Great Depression.

Given the general collapse across the globe, many are concerned that this is the worse economic crisis since the Great Depression.  I am not sure that is true, but it is something we need to be concerned about.

The heart of the controversy surrounding the book turns on if we believe the New Deal ended the Depression or prolonged it.  There is a paper out of UCLA that talks to this issue from the "prolonged the Depression" point of view.  A UCLA 2004 news release says:
Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
The law in question was the National Industrial Recovery Act (NIRA).

While there are big question as to if FDR and his advisors were Keynesians, today we cage the discussion in terms of Keynesian economics.  Professor and NYT Columnist Paul Krugman is one of the most vocal advocates for the Keynesian approach.  He basically believes the $787 Billion dollar stimulus package is only one-third of what we will need. And, our own Left in Lowell blog site advocates for the FDR approach.

The other approach believes that action is needed, especially with regard to failed banks--one of the things that is needed in a depression is to get the credit flowing again--but that a Keynesian stimulus is not the answer.  That view is that running up the debt does not solve the problem.  That is mostly advocated by Troglodytes and others who live in caves and eat little children for dinner. What can I say?

A CNN poll, reported by Consumer Reports, shows that on 20 February 53% of the American People believe the Stimulus Package would help the economy and 44% thought it would not.  That left 3% who were in the dark, which is a pretty small number.

In sum, I liked the book and thought it opened a new view on what has become received wisdom, with little dissent.  Reading the book is a chance to think again about a very important question.  What is the best path out of a Recession or a Depression.

Regards  --  Cliff


Anonymous said...

What exactly do you propose to do about "failed banks" to get credit flowing again? It seems to me that the problem with the "failed banks" is that, well, they failed! What I mean is that the banks that are in danger of collapse (or "supervised merger" as they call it) are in that trouble because they do not have enough cash reserves to meet the rules that were set in the wake of the Great Depression.

Allow me to digress for a second, I don't know the exact numbers, but a bank must maintain a certain amount of case on hand at the end of the day that is a percentage of their deposits. Suppose a bank is right at the margin and someone defaults on their mortgage payment or writes a large check on their home equity line of credit. That night, when they report their numbers to the Office of the Comptroller of the Currency (OCC), they will be below their margin. In that even, they will arrange to borrow some money from a bank with an excess. This is where the "overnight rate" that you often hear of comes from.

So, the problem with the "failed banks" that are still operating is not that they are below the margin, but that they are in danger of becoming chronically below the margin either because they have a portfolio of bad debt that makes it likely that they will suddenly fall below the margin, and/or that no other bank wants to lend them money because of their bad debt portfolio.

So, when the OCC and other regulators, which receives reports from every bank, every night, decides that a bank is going too far in that direction, they arrange for a larger bank with some excess margin to take it over. They will supervise the merger and may even provide some assistance.

Now, back to my question, exactly what is wrong with this scenario that we need to do something? They current failure system is working well. This is not the 1930s where a failed bank took your money with it. When a bank is forced into a merger in this day and age, it is before it gets insolvent, so the depositors are not losing their money. In the rare instance where the bank is too far gone, there is still insurance.

You mention that banks need to start lending again. Sure they do, after all, they don't make money by paying interest; they make money by collecting interest. Once we get rid of the deadwood banks, the strong ones will have more depositors and will have a strong incentive to lend since they have to do something with those deposits.

I say let the banks fail. The government's responsibility is to help it happen in an orderly, but expeditious, fashion.

What about all the complex accounting issues, such as mark to market and whatnot, you ask? Do nothing. Stop trying to assist homeowners who bought too much house. They will not be able to afford it even with reduced rates. I'm not speculating on that, they recent evidence is that those people that have already benefited from adjusted mortgages, are still failing. Let them fail. Let the houses foreclose. Let the lenders find out what the house is really worth by selling it. By delaying the inevitable you merely prolong the ancillary problems, such as those involving the accounting rules.

Let the markets work, and give them some gentle assistance in doing so, then get out of the way.

rant off

the other cliff

C R Krieger said...

I am not as optimistic as "the other cliff" that the Office of the Comptroller of the Currency will get us through this bad patch quickly enough to get the economy back on a roll before things go really bad.  People are beginning to use the "D" word.  It is not the objective part of that that worries me, but the subjective.

Once people think that we are in or on the rim of a depression, their actions change.  They stop buying and start hoarding.  Then we do get a depression.  The numbers for auto sales in February are an indication of the approaching problem.  GM was down 53%.  Even Ford, which was claiming it could make it on its own, was down 48%.

For all the hope I had in Larry Summers, it appears this Administration is no wiser than FRD's Team at this point in first 100 days.  I wish it was wiser and more effective.  Otherwise it could be a long, dismal time.

Regards  --  Cliff

C R Krieger said...


I think the last para of my comment should have read:

For all the hope I had in Larry Summers, it appears this Administration is no wiser than FRD's Team was at this point their first 100 days.  I wish it was wiser and more effective.  Otherwise it could be a long, dismal time.

Regards  --  Cliff