Audit the Fed? What would that accomplish?

[drkitten]

That is what amuses me about so many of these right wing conspiracy wackjobs. They claim to love the Free Market system, but have no freaking idea of how it operates.

Well, many of them also claim to love the Bible and have never read it.

Basically, conspiracy theory, like many religions, is all about what's wrong with the world. It's often easier to identify the things that you don't like and attribute it to someone or something that you don't like (or have been trained not to like) than it is to come up with an actual workable solution.

There was an interesting survey I saw a while ago. Some large percentage of fundamentalists surveyed (40%?) thought that "from each according to his abilities, to each according to his needs" was from the Bible. (Here's a modern spotting of that mistake.)

What does that say about their familiarity with both Communism and the Bible? If they disagree with it, it must be "communist" -- but if they agree with it and it sounds pithy, it must be a biblical quotation....

 

[The Central Scrutinizer]

Basically, conspiracy theory, like many religions, is all about what's wrong with the world. It's often easier to identify the things that you don't like and attribute it to someone or something that you don't like (or have been trained not to like) than it is to come up with an actual workable solution.

There's also the blame angle. Some guy sits at home, he's the smartest guy in the trailer park, and some damn Mexican just took his job. He sees the Jew banker in the $1000 suit on CNN, and dammit, it must somehow be his fault, because it certainly isn't mine.

 

[Sceptic-PK]

"I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it." - Fed Chairman Ben Bernanke.

I’ve been long wanting to draw attention to this quote from Tippit’s sig.

Tippit, is there any particular reason (other than you being a moonbat armchair economist) you cherry-pick this particular quote from Bernanke’s excellent speech, when there are whole paragraphs dedicated to showing how the gold standard perpetuated and increased the severity of the Great Depression? I know you’re a big fan of gold, so I am curious whether you’ve actually read the speech in its entirety, and if you have, what your thoughts are about mainstream economists’ conclusions regarding gold’s role in the GD?

 

[The Central Scrutinizer]

I’ve been long wanting to draw attention to this quote from Tippit’s sig.

Tippit, is there any particular reason (other than you being a moonbat armchair economist) you cherry-pick this particular quote from Bernanke’s excellent speech, when there are whole paragraphs dedicated to showing how the gold standard perpetuated and increased the severity of the Great Depression? I know you’re a big fan of gold, so I am curious whether you’ve actually read the speech in its entirety, and if you have, what your thoughts are about mainstream economists’ conclusions regarding gold’s role in the GD?

I see you're new here. Don't expect a rational answer.

 

[Sceptic-PK]

I see you're new here. Don't expect a rational answer.

Haha, don’t you worry about that. Been lurking for 3-4 years and I know all about our friend Tippit. But I have wanted to ask him ever since he added that quote to his sig.

 

[WildCat]

Sweet, sweet gold... my precious...

 

[stilicho]

I’ve been long wanting to draw attention to this quote from Tippit’s sig.

Tippit, is there any particular reason (other than you being a moonbat armchair economist) you cherry-pick this particular quote from Bernanke’s excellent speech, when there are whole paragraphs dedicated to showing how the gold standard perpetuated and increased the severity of the Great Depression? I know you’re a big fan of gold, so I am curious whether you’ve actually read the speech in its entirety, and if you have, what your thoughts are about mainstream economists’ conclusions regarding gold’s role in the GD?

It's been drawn to his attention, particularly by me as long as a year ago. He stated that to call that quip light-hearted or anecdotal was equal to mocking Milton Friedman at his own birthday party.

 

[MikeMangum]

Well, right there is a very bad thing.

The easiest way to make sure that a bank fails is to let everyone know that it's worried about failing. If you know that First Federal Bank and Trust needed a bailout, but First National Savings and Loan didn't, where are you going to going to bank? Telling everyone that FFB&T needed a bailout will force a run on that particular bank.

It would force a run on that bank, but only if the customers of that bank are stupid.

I can't believe I need to post it, but here is the wiki link for the FDIC^WP.

BTW, I've actually had my bank taken into recievership by the FDIC. It was a horrible experience. About 6 months afterwards, I had to log into a different website to do my online banking (www.chase.com as opposed to www.wamu.com). The horror!

It is completely painless to a customer of a bank that fails, at least it was in my case. In fact, my debit card still says Washington Mutual.

 

[MikeMangum]

I’ve been long wanting to draw attention to this quote from Tippit’s sig.

Tippit, is there any particular reason (other than you being a moonbat armchair economist) you cherry-pick this particular quote from Bernanke’s excellent speech, when there are whole paragraphs dedicated to showing how the gold standard perpetuated and increased the severity of the Great Depression? I know you’re a big fan of gold, so I am curious whether you’ve actually read the speech in its entirety, and if you have, what your thoughts are about mainstream economists’ conclusions regarding gold’s role in the GD?

The gold standard did not perpetuate or increase the severity of the depression, and that is not the argument that Bernanke makes in his speech. His argument is that tight monetary policy essentially caused the depression.

The role of the gold standard was that, as implemented at the time, it fixed exchange rates for various currencies, causing the depression (caused by the Fed) to go global. From Bernanke's speech:

Facilitating the cross-sectional natural experiment was the fact that the international gold standard, which had been suspended during World War I, was laboriously rebuilt during the 1920s (in a somewhat modified form called the gold-exchange standard). Countries that adhered to the international gold standard were essentially required to maintain a fixed exchange rate with other gold-standard countries. Moreover, because the United States was the dominant economy on the gold standard during this period (with some competition from France), countries adhering to the gold standard were forced to match the contractionary monetary policies and price deflation being experienced in the United States.

...

Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output. One can read their discussion as dividing countries into four categories.

The speech makes an argument that the tight monetary policy of the Fed caused the depression and prolonged it. It also makes the argument that because of the gold-exchange standard (different than simply "the gold standard") prevented exchange rates from floating freely and essentially forced other nations into deflationary monetary policy as well, which meant that monetary policy set by the Fed impacted much of the rest of the world as well.

The quote in Tippit's signature is not counter to the thrust of the speech by Bernanke. In fact, that is essentially the gist of the speech: the Fed caused the great depression with tight monetary policy and fixed exchange rates caused the Fed's mistake to harm the economies of many other countries.

ETA:
From the speech...

The first category consisted of countries that did not adhere to the gold standard at all or perhaps adhered only very briefly. The example cited by Friedman and Schwartz was China. As they wrote (p. 361), "China was on a silver rather than a gold standard. As a result, it had the equivalent of a floating exchange rate with respect to gold-standard countries. A decline in the gold price of silver had the same effect as a depreciation in the foreign exchange value of the Chinese yuan. The effect was to insulate Chinese internal economic conditions from the worldwide depression. . . . And that is what happened. From 1929 to 1931, China was hardly affected internally by the holocaust that was sweeping the gold-standard world, just as in 1920-21, Germany had been insulated by her hyperinflation and associated floating exchange rate."

...

The second category consisted of countries that had restored the gold standard in the 1920s but abandoned it early in the Depression, typically in the fall of 1931. As Friedman and Schwartz observed (p. 362), the first major country to leave the gold standard was Great Britain, which was forced off gold in September 1931. Several trading partners, among them the Scandinavian countries, followed Britain's lead almost immediately. The effect of leaving gold was to free domestic monetary policy and to stop the monetary contraction. What was the consequence of this relaxed pressure on the money stock? Friedman and Schwartz noted (p. 362) that "[t]he trough of the depression in Britain and the other countries that accompanied Britain in leaving gold was reached in the third quarter of 1932. [In contrast, i]n the countries that remained on the gold standard or, like Canada, that went only part way with Britain, the Depression dragged on."

It wasn't the gold standard, it was the fixed exchange rates combined with monetary contraction. If someone actually read that speech and came to the conclusion that Bernanke is arguing that pegging a currency to a specific amount of gold (without also fixing currency exchange rates) caused the great depression, they need to re-read the speech.

 

[The Central Scrutinizer]

It would force a run on that bank, but only if the customers of that bank are stupid.

I can't believe I need to post it, but here is the wiki link for the FDIC^WP.

BTW, I've actually had my bank taken into recievership by the FDIC. It was a horrible experience. About 6 months afterwards, I had to log into a different website to do my online banking (www.chase.com as opposed to www.wamu.com). The horror!

It is completely painless to a customer of a bank that fails, at least it was in my case. In fact, my debit card still says Washington Mutual.

Well, a lot of people are stupid. That doesn't make it any less painful for the bank.

 

[Sceptic-PK]

Thanks for the reply, Mike.

The gold standard did not perpetuate or increase the severity of the depression, and that is not the argument that Bernanke makes in his speech. His argument is that tight monetary policy essentially caused the depression.

How do you distinguish “tight monetary policy” from “tight monetary policy caused by adherence to the gold standard” though, at least as it pertains to other countries?

Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.

Notably, in the paper that revived Friedman and Schwartz's temporarily dormant insight, Choudhri and Kochin (1980) considered the relative performances of Spain (which, as mentioned, did not adopt the gold standard), three Scandinavian countries (which left gold with Great Britain in September 1931), and four countries that remained part of the French-led Gold Bloc (the Netherlands, Belgium, Italy, and Poland). They found that the countries that remained on gold suffered much more severe contractions in output and prices than the countries leaving gold. In a highly influential paper, Eichengreen and Sachs (1985) examined a number of key macro variables for ten major countries over 1929-35, finding that countries that left gold earlier also recovered earlier. Bernanke and James (1991) confirmed the findings of Eichengreen and Sachs for a broader sample of twenty-four (mostly industrialized) countries (see also Bernanke and Carey, 1996), and Campa (1990) did the same for a sample of Latin American countries. Bernanke (1995) showed that not only did adherence to the gold standard predict deeper and more extended depression, as had been noted by earlier authors, but also that the behavior of various key macro variables, such as real wages and real interest rates, differed across gold-standard and non-gold-standard countries in just the way one would expect if the driving shocks were monetary in nature. The most detailed narrative discussion of how the gold standard propagated the Depression around the world is, of course, the influential book by Eichengreen (1992). Eichengreen (2002) reviews the conclusions of his book and concludes largely that they are quite compatible with the Friedman and Schwartz approach.

I understand that the fixed exchange was the crux of the problem in spreading the disease, but how is a central bank meant to fight severe contraction when their hands are tied by a commodity-backed currency?

We argue that the most important barrier to actions that would have arrested or reversed the decline was the mentality of the gold standard…the gold-standard mentality and the institutions it supported limited the ability of governments and central banks to respond to adversity; they led to the adoption of policies that made conditions worse instead of better… In this environment the gold standard became an engine for deflation. Supplies of money and credit depended on the quantity of gold and convertible foreign exchange held by central banks. Eichengreen & Temin, p183-201

Third were countries that remained on gold but had ample reserves or were attracting gold inflows. The key example was France (see p. 362), the leader of the Gold Bloc. After its stabilization in 1928, France attracted gold reserves well out of proportion to the size of its economy. France's gold inflows allowed it to maintain its money supply and avoid a serious downturn until 1932. However, at that point, France's liquidation of non-gold foreign exchange reserves and its banking problems began to offset the continuing gold inflows, reducing the French money stock. A serious deflation and declines in output began in France, which, as Friedman and Schwartz pointed out, did not reach its trough until April 1935, much later than Great Britain and other countries that left gold early.

Fourth, and perhaps the worst hit, were countries that rejoined the gold standard but had very low gold reserves and banking systems seriously weakened by World War I and the ensuing hyperinflations. Friedman and Schwartz mention Austria, Germany, Hungary, and Romania as examples of this category (p. 361). These countries suffered not only deflation but also extensive banking and financial crises, making their plunge into depression particularly precipitous.

Doesn’t this indicate that it wasn’t just the fixed exchange that was the problem, but also the rigidities of a gold standard generally? ie countries that had plenty of gold were able to survive for a while, and countries that had little were in serious trouble?

The role of the gold standard was that, as implemented at the time, it fixed exchange rates for various currencies, causing the depression (caused by the Fed) to go global. From Bernanke's speech:

The speech makes an argument that the tight monetary policy of the Fed caused the depression and prolonged it. It also makes the argument that because of the gold-exchange standard (different than simply "the gold standard") prevented exchange rates from floating freely and essentially forced other nations into deflationary monetary policy as well, which meant that monetary policy set by the Fed impacted much of the rest of the world as well.

The quote in Tippit's signature is not counter to the thrust of the speech by Bernanke. In fact, that is essentially the gist of the speech: the Fed caused the great depression with tight monetary policy and fixed exchange rates caused the Fed's mistake to harm the economies of many other countries.

ETA:
From the speech...


It wasn't the gold standard, it was the fixed exchange rates combined with monetary contraction. If someone actually read that speech and came to the conclusion that Bernanke is arguing that pegging a currency to a specific amount of gold (without also fixing currency exchange rates) caused the great depression, they need to re-read the speech.

I never said the gold standard “caused” the depression, I said it helped perpetuate it (by preventing countries from acting against severe contraction, and recovery only became possible after a country abandoned gold).

But I’m happy to hear otherwise…