A PREVENTABLE MESS
This Paul Krugman op-ed titled "Partying like it's 1929" in the New York Times, gives a timely reminder of a lesson from history:
"Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931."
What follows is a Banking 101 lesson on one of the several contributing factors of the Great Depression, and an explanation of how it's potentially happening again:
"The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.
Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades."
Part of yesterday's post dealt with a possible solution to slow down this vicious cycle.
Another major contributing factor to the Great Depression of course was the simultaneous Protectionist political sentiments that turned politically expedient wishes into laws, that then lead to a harsh global financial recession lasting years.
We have the seeds for the same thing being planted again, with both Democrats and Republicans taking a step back from America's much-needed commitment to Global Trade. The recent Nafta-bashing populist politicking by the Clinton and Obama campaigns is a case in point.
Sorry to point out what should be well-known history lessons on an Easter Sunday. But sometimes we need to remind ourselves of some of the basic, presumably well-remembered foibles from our past. And this is one of those times.
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