Fed Great Depression and Great Recession Liquidations Go Unexplained

 This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/financial/fed-great-depression-and-great-recession-liquidations-go-unexplained?post=91522&uid=4798

Andrew Mellon made a statement that is in dispute as to its origin. It was found in the writings of Herbert Hoover. While many say it was not a legitimate expression of Andrew Mellon's opinions, I believe it was the expression of Hoover's understanding of the Federal Reserve Bank and that it applies to our times as well.

George Selgin of CATO said regarding the quote:
The famous Mellon “statement” is itself a caricature, made up after the fact by Hoover himself. There is actually no direct evidence that Mellon favored all-out “liquidation.” As an ex-officio member of the FRB, he supported rate cuts. For details see the abstract at Wiley.com. 
 
The statement as found in Hoover's writings that Hoover attributed to Andrew Mellon was as follows:

 “…liquidate labor, liquidate stocks, liquidate 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.”

I would not be so obsessed with Mellon's view or what I think can be attributed to Mellon even if the quote is made up by Hoover, except that Bernanke presided over another liquidation in 2008. Mellon and Bernanke appear to be on the same liquidation team, though separated by about 76 years!  People have to realize that Mellon, unlike current Secretaries of the Treasury, was a member of the Federal Reserve and that Hoover was speaking his mind about the Federal Reserve in quoting or making up the Mellon quote.


My pesky persistence at Scott Sumner's blog regarding this subject caused me to ask the question: “If Bernanke was such a student of the Great Depression, why didn’t he intervene earlier?” To this, Don Geddis, a Stanford grad and Market monetarist responded on the Money Illusion blog:

This is one of your most insightful questions. It may be one of the biggest macro mysteries of the last decade. The truth is, nobody (except perhaps for Bernanke himself) knows the answer to this question.
Bernanke not only understood the Great Depression, he also understood how a central bank could fix (or prevent) it. In 1999, as an academic, he wrote a paper analyzing the Japanese “lost decade”, and sharply criticizing the Japan central bank for not taking the appropriate monetary policy steps to correct the economy. And listing a large number of specific steps they could take. If there was anyone who you would wish to be chair of the US Federal Reserve in 2008, Bernanke seemed like he should be the guy.
And then, in 2008, when he actually was chair, Chairman Bernanke did not in fact act according to the monetary policy advice of 1999 Bernanke the Academic. Nobody knows why.
There are lots of theories and speculation. Fed chair is not a dictatorship; he still would need to convince the other (perhaps much more ignorant) Fed governors. There’s also a lot of politics in Washington, perhaps concern that “radical action”, if unsupported by the elected officials, would have a danger of impacting the Fed’s “independence”. There’s talk of the “FedBorg”, where the organization seems to somehow assimilate everyone who enters it, and they begin acting just like everyone else who has been there, regardless of their prior history.
But the truth is, nobody really knows. On this blog, we generally believe that 1999 Bernanke was correct, understood the causes of demand recessions, and knew the fixes. But 2008 Bernanke did not implement that advice. The million-(trillion?-) dollar, unanswered, question is: why not? We don’t know.    
Geddis, went on to say the following in response to my statement that the Fed has to be held accountable, at least in the analysis, for what it has done to America:

Scott Sumner agrees with you. It’s a national tragedy that the there is no official way to evaluate the Fed’s performance. The key sentence: “The Fed does not currently evaluate whether its past decisions were wise, even in retrospect.” Forget about holding the Fed to some goal imposed from the outside. The Fed isn’t even willing to state its own goals, by which it would be willing to be held accountable.
Clearly, Democracy is incompatible with this refusal by the Fed to reveal why it acted the way it did in the great liquidation of 2008. Citizens have the right to understand this subject!

It is interesting to note that Mellon was rehabilitated, known as a man who pushed for lower interest rates, and better monetary policy, to help deliver the nation from the Great Depression. Truth is, Bernanke's image was rehabilitated the same way, as he used monetary policy not seen since the Great Depression to prevent the Great Recession from becoming the Great Depression. Bernanke was looked upon as a hero.

Only problem is, both of these men gave a glimpse into the inner workings of the Federal Reserve Bank, and it isn't a pretty picture. They liquidated before restoring. They didn't have to liquidate, at all. They could have limited the damage of the credit crises they faced by simply coming to the aid of the markets much sooner.

Bernanke was constrained from acting on steps he felt would be superior to the Japanese lost decade, but instead he allowed another liquidation. That is troubling. It appears that, unless it explains itself, the Fed was not acting in the national interest in the 1930's nor in the 2000's. Geddis said the Fed won't  explain itself.

I believe that the Fed was engaged in a conspiracy at Basel 2, adopting mispriced risk and off balance sheet banking to allow that risk to be hidden. Then Bernanke presided over a liquidation that "corrected" the exuberance of the markets and caused a massive transfer of wealth from the middle classes to the wealthy. Now, I don't speak for the Market Monetarists, but clearly they expose this as a possible scenario, though they would try to explain in through more benign means.

I lived through all this in Reno and Las Vegas. I saw marriages dissolved, pets abandoned, people committing suicide and destruction of houses by those who felt betrayed by this purging of the rottenness. I saw it all. And I see an underclass of the perpetually unemployed totaling millions of people, many who have no hope and have had no hope for financial success for years after 2008.

I suggest that the rottenness was the market destruction itself, a great evil inflicted upon the people. Until I get a better explanation I continue to stick to that view. Just remember, bankers never forget their business. Central bankers never forget their patterns, and we just need to know more about that. When you have Will Rogers making fun of the term "restoring confidence" in the 1930's, and we see the term on CNBC over and over soon after the present Great Recession crisis, we can be assured that bankers never forget, though we as a nation continue to operate in the dark, with just a few glimpses of sunlight.

I hope I provided that to you, thanks mostly to the Market Monetarists.

For Further Reading:

Fed Premeditated Mispricing Of Risk In Housing, Oil, Junk Bonds And Other Markets 

LIBOR Destroyed Subprime. But The Fed Deepened The Great Recession

Larry Summers 100 Dollar Bill Ban And Westfalia Lost

Proof The Federal Reserve Was Responsible For The Housing Bubble And Crash 

 

 

 

 



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