Third Party & Independents Archives

Looking at the Numbers

While there has been a lot of talk recently about fiscal policy, the death of capitalism, deficit spending vs bailouts, and more, the problem is that many people really haven’t done the research into where the problems lie and what our current actions or inactions will do, relying instead upon partisan hackery to guide us. But there is someone who has, someone who has been around a long time who almost never gives interviews. Until recently..

Anna Schwartz was born in 1915 in New York City. She has been working at the National Bureau of Economic Research gathering and analyzing data since 1941. At 94 years old, she is still going strong. And she has proven in the past that data can change the world.

In the 1960s, she wrote A Monetary History of the United States (with Milton Friedman) after putting ten years of detective work into it, helping found the monetarist theory of economics. Before this book, most economists believed that the quantity of money circulating in the economy had no influence on prices or on growth. But facts, as we hear, are nagging things indeed. As Guy Sorman writes:

Every time the Federal Reserve (and the central banks before it) created an excess of money, either by keeping interest rates too low or by injecting liquidity into banks, prices inflated. At first, the easy money might seem to boost consumers’ purchasing power. But the increase would be only apparent, since sellers tended to raise the prices of their goods to absorb the extra funds. Investors would then start speculating on short-term bets—whether tulips in the seventeenth century or subprime mortgages more recently—seeking to beat the expected inflation. Eventually, such “manias,” as Schwartz calls them, would begin replacing long-term investment, thus destroying entrepreneurship and harming economic growth.

By contrast, by removing excess liquidity, the central bank can cause the sudden collapse of speculative excess, and it can also hurt healthy recovery or growth by constricting the money supply. There is now a near-consensus among economists that lack of liquidity caused the Great Depression. During the severe downturn of 1930, the Fed did nothing as a first group of banks failed. Other depositors became alarmed that they would lose their money if their banks failed, too, leading to further bank runs, propelling a frightening downward economic spiral.

Unfortunately, in this recent interview, Schwartz says that this lesson of the past seems all but forgotten.

Margaret Thatcher was the first to understand that the monetarists were right, following their rules when she came to power in 1979, taming inflation and reinvigorating the British economy. The U.S. followed during the early 1980s, led by Paul Volcker, a Friedmanite then at the head of the Federal Reserve, who, with Ronald Reagan’s strong support, ended raging inflation, though not without a lot of short-term pain. “It was a strenuous experience,” Schwartz remembers. As Volcker tightened the money supply, making credit harder to come by, unemployment spiked to about 10 percent; many firms failed. But starting in 1983, the inflation beast defeated, a new era of vigorous growth got under way, based on innovation and long-term investment.

Instead of staying the monetarist course, Volcker’s successor as Fed chairman, Alan Greenspan, too often preferred to manage the economy—a fatal conceit, a monetarist would say. Greenspan wanted to avoid recessions at all costs. By keeping interest rates at historic lows, however, his easy money fueled manias: first the Internet bubble and then the now-burst mortgage bubble. “A too-easy monetary policy induces people to acquire whatever is the object of desire in a mania period,” Schwartz notes.

Greenspan’s successor, Ben Bernanke, has followed the same path in confronting the current economic crisis, Schwartz charges. Instead of the steady course that the monetarists recommend, the Fed and the Treasury “try to break news on a daily basis and they look for immediate gratification,” she says. “Bernanke is looking for sensations, with new developments every day.”

This is similar to what I pointed out recently that the underlying real cause of our current financial issues can be laid at the feet of the Federal Reserve, especially Alan Greenspan, for trying to micromanage a never contracting, never failing economy. By artificially keeping interest rates down he created cheap credit, increasing the credit boom beyond what anyone could control until it became a credit bust.

But don't we have to do SOMETHING? Don't we have 'systemic risk' to be concerned about? Not according to Schwartz.

“The worst thing for a government to do, though, is to act without principles, to make ad hoc decisions, to do something one day and another thing tomorrow,” she says. The market will respond positively only after the government begins to follow a steady, predictable course. To prove her point, Schwartz points out that nothing the government has done to date has really thawed credit.

And here we get to the actions that FDR took that caused investors and business holders to sit tight on their wealth and ride out the storm. First promising to limit the governmental interventions that the previous administration put into place that spurred on the credit problems of the late 1920s and fueled the monetary problems he was inheriting and then doing a complete about face once in office. Then making change after change to the number of goods that were taxed or tariffed that previously weren't, followed by floating several trial balloons about instituting a 100% tax bracket and other attacks on those with wealth in those times. Are we looking to repeat the mistakes of that era, the actions that helped turn a bad recession into The Great Depression?

As for the worries of deflation?

“The risk of deflation is very much exaggerated,” she answers. Inflation seems to her “unavoidable”: the Federal Reserve is creating money with little restraint, while Treasury expenditures remain far in excess of revenue. The inflation spigot is thus wide open. To beat the coming inflation, a “new Paul Volcker will be needed at the head of the Federal Reserve.”

There is a lot of lessons we could learn from Anna Schwartz, if people want to listen.

Posted by Rhinehold at May 18, 2009 2:52 PM
Comment #281737

We’re in deep $#!+.
But one doesn’t need a crystal ball or need to be clairvoyant to see where several decades of abuses were headed.

Yet, the majority of voters repeatedly rewards Congress with 85%-to-90% re-election rates. And Congress just gave itself its 10th raise in 12 years. Cha Ching!

At any rate, the voters have the government that the voters elect (and re-elect, and re-elect, and re-elect , … , at least until that finally becomes too painful).

Posted by: d.a.n at May 18, 2009 11:50 PM
Comment #281741

I love convenient history.

A couple of problems with the article you linked.

Volcker became president of the Fed in 1975, not 1980, but I guess that didn’t fit the Regean dialogue.

Second and third both Greenspan and Bernake are monetarist.

Fourthly, why is squeezing out inflation not “managing” an economy but increasing money supply is?

This sounds more like a supply side rant. There’s a reason sometimes the Laffer curve was called the laugher curve.

I guess if fact picking is your taste this makes perfect sense.

Posted by: gergle at May 19, 2009 4:09 AM
Comment #281742

Oh yeah, I missed when capitalism was declared dead. Laissez Faire is once again considered a Laffable joke, however.

Posted by: gergle at May 19, 2009 4:11 AM
Comment #281744

You are underestimating the potential dangers of a deflationary cycle. They do not happen often but when they do they are harder to get out of than inflation. People put off buying goods because the longer they wait, the cheaper the goods become. They save money. Saving money is good, but when everyone does it at the same time the economy falters,less goods are sold,sellers lay off more people and decrease margins. There is less money to spend available so furthur pressure to lower prices and payrolls etc. There is considerable deflationary pressure in the current economy. Inflation is NOT the current problem and can be dealt with by reductions in the money supply ie. increasing interest rates.

Posted by: bills at May 19, 2009 5:59 AM
Comment #281748
Volcker became president of the Fed in 1975, not 1980, but I guess that didn’t fit the Regean dialogue.

The article never once states that Volker became the president of the Fed in 1980. Public school system I assume?

Second and third both Greenspan and Bernake are monetarist.

Claiming to be monetarists and BEING monetarists are two different things. They abandon their principles to micromanage an economy focusing on the here and now, not the long term needs. And being a monetarist but reacting to the wrong forces just makes you wrong. The linked article (which I assume you didn’t read?) addresses this:

Yet isn’t Bernanke a disciple of Friedman and Schwartz? He publicly refers to them as mentors, and, thanks to their scientific breakthrough, he has famously declared that “the Great Depression will not happen again.” Bernanke is right about the past, Schwartz says, “but he is fighting the wrong war today; the present crisis has nothing to do with a lack of liquidity.” President Obama’s stimulus is similarly irrelevant, she believes, since the crisis also has nothing to do with a lack of demand or investment. The credit crunch, which is the recession’s actual cause, comes only from a lack of trust, argues Schwartz. Lenders aren’t lending because they don’t know who is solvent, and they can’t know who is solvent because portfolios remain full of mortgage-backed securities and other toxic assets.

Are you suggesting that Anna Schwartz doesn’t know what she’s talking about?

Posted by: Rhinehold at May 19, 2009 11:49 AM
Comment #281756

Rhinehold, excellent article. I found the link to be interesting yet continuing down the same old road of “its the governments fault” no matter the reasons. Which is in part what you seem to be saying here.
This reminds me of the highlander and the “there can be only one” theory. Macro, no Micro, no no Macro, no no no Micro and so on. Perhaps both the macro and the micro play a part in the real world.
Since Volker haven’t we have been following the Monetarist theory with only slight modifications as real world conditions prove to be necessary? Yet here we are in a mini depression. Are you saying it is due entirely to the Federal Reserve not being 100% pure and true to the theory?

If Ms. Schwartz is right then upon recovery from this bout of mini depression we will need to go into a self induced recession to solve the inflation created by the mini depression, seems no win to me as we have had nothing but jobless recoveries since the days of Volker have’t we?

Posted by: j2t2 at May 19, 2009 1:07 PM
Comment #281774


>Margaret Thatcher was the first to understand that the monetarists were right, following their rules when she came to power in 1979, taming inflation and reinvigorating the British economy. The U.S. followed during the early 1980s, led by Paul Volcker, a Friedmanite then at the head of the Federal Reserve, who, with Ronald Reagan’s strong support, ended raging inflation, though not without a lot of short-term pain.

Since Volcker began raising interest rates well before 1980 or 1979, I’d have to conclude that bit of info is, at best, misleading. But I guess that didn’t fit your rhetoric, either. Must be that damn public education. I suppose that is completely true to you. Therefore it MUST be a fact. Why wouldn’t you say Carter was the first to understand? Reagan and Carter had equal roles in setting the Fed interest rates….none. Much the same as Maggie, I suspect. Of course, unemployment was a little nasty side issue, but since we’re talking about what happened to the wealthy people during Reagan’s years, I guess it doesn’t really matter does it? Please note the sarcasm.

You always seem to miss the points where your arguments fall apart.

>Fourthly, why is squeezing out inflation not “managing” an economy but increasing money supply is?

I guess handing bucket loads of money to the rich isn’t managing an economy, but creating a class of Walmart workers without benefits or union access, or ramping up illegal workers is.

Thanks, unka Ron. Must be that damn public educatshun agin. I jes don’t get it do I? Mebbe weun’s need some of that there privit edukashun. Walmart dont pay fer it, though, can you spare a dime? Rhinehold says weeze jes too dumb to unnerstand.

It’s just magical the way the world works when you wear the right colored glasses.

Freidman didn’t care about pain. It’s good for us. Maybe him and Rumsfeld or Cheney were buds. That’s great if you are a tyrant or wealthy.

Until you can explain your one-way theory of economics, I’ll just write it off to a poor private education. I think the problem is that YOU don’t get it. Greenspan, when the economy collapsed, finally got that Freidman simply doesn’t understand human nature, nor did Greespan, because they live in a rarified world.

Greenspan was a monetarist, as is Bernake. However, when confronted with reality, they realize that the real world is different from a classroom. Thank goodness. Because they were snapped out of their dream doesn’t mean they aren’t monetarist. It means Freidman’s brand of monetarism doesn’t work. The derivatives market was as about as freeform as you can get. It failed miserably, even with all those really, really smart people around.

To date, I haven’t seen any Central bank figure, give up on using money supply to moderate up and down ticks. That’s monetarism, not some convenient single use , single advocate of a particular brand of supply side,inspite of how you want to redefine it.

But, by all means keep dreaming. Maybe one day you too will be like the frumpy woman in Scotland singing on American Idol.

For those interested in more standard definitions:

Posted by: gergle at May 19, 2009 10:25 PM
Comment #281776

Oops forgot your last question:

>Are you suggesting that Anna Schwartz doesn’t know what she’s talking about?


Which would be a typical answer from you, but I’ll play nice, not treat you like a moron, and expand.

I think she is promoting her brand of economics, which is easy to do, when you don’t have to face masses of unemployed people in soup lines.

I think there was and still could be a threat of deflation. She is correct the money supply spigot is wide open, and it should be. Note she doesn’t say it shouldn’t be. Which monetarist’s are, in your opinion saying it shouldn’t be? Excluding Merkel. Inflation will at some point be a threat, and will take a “Volckerlike” response. But then that’ll be managing the economy won’t it?

You keep warning Obama is gonna repeat FDR’s mistakes. Got any forecasts as to when that’ll be?

Posted by: gergle at May 19, 2009 10:36 PM
Comment #281781

Tall paul made a gutsy bold move and broke the back of stagflation we did suffer for a short while but in reflection the short term pain we endured was nothing compared to the ravages of the super high inflation - stagflation of the 1970s early 1980s also oil did hit $49 a barrel in 1979 and went down to the mid to low $20s in 1983 -1984 and stayed low for a long time also Reagan kept paul around till what 1987. I still say Bernarke is not a neocon like Greenspan.

Posted by: Rodney Brown at May 19, 2009 11:23 PM
Comment #281786

“”Congress already has a long to-do list as it considers financial services industry reforms, but Bernanke said it also must rework the Gramm-Leach-Bliley Act of 1999.”“”

Posted by: Rodney Brown at May 20, 2009 1:17 AM
Comment #281968

A list of 1,817 weak banks and thrifts with D+ or worse ratings, and a list of 871 weak insurers with D+ or worse ratings (all in the U.S.).

Posted by: d.a.n at May 24, 2009 11:45 AM
Comment #282074

Reagan and Volker created short term pain? They inherited a trillion dollar debt and left BushI a two trillion dollar debt…hmmm…short term?

Posted by: Marysdude at May 26, 2009 6:02 PM
Comment #282100

US wants to paint the world white to save energy good Idea marysdude!

Posted by: Rodney Brown at May 27, 2009 1:08 AM
Comment #282101

“”They inherited a trillion dollar debt and left BushI a two trillion dollar debt…hmmm…short term? “” When Volker broke the back of horrible stagflation and inflation it caused a short recession in 1982 remember MD. The deficit was another subject, Reagan had 6 plus years of really good growth. tax cuts and out of control spending and a huge military buildup = Deficit.

Posted by: Rodney Brown at May 27, 2009 1:24 AM
Comment #282114

””“They inherited a trillion dollar debt and left BushI a two trillion dollar debt…hmmm…short term? “””” Some Dividends also, Mention the fact of a free Europe and a free Russia and all of it’s satellites, Also the next Presidents “Clinton” were able to cut the military spending .

Posted by: Rodney Brown at May 27, 2009 10:42 AM
Comment #282115

Bush “Jr.” Quote “Had not vetoed a single spending bill during his first three years in office.President Reagan vetoed 22 spending bills during his first three years in office.”

Posted by: Rodney Brown at May 27, 2009 11:33 AM
Comment #282328

It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.

Posted by: Rodney Brown at June 1, 2009 6:37 PM
Comment #282330

Ford sells more autos than Toyota in April 2009, If Gm makes it through Ford will be no1 when was the last time Ford sold more than GM 50 - 60 years Ago ? GM Geez

Posted by: Rodney Brown at June 1, 2009 6:50 PM
Comment #282342

1.25 Therm = 1 Gallon equivalent of gasoline.
A therm is a unit of heat energy equal to 100,000 British thermal units (BTU). It is approximately the energy equivalent of burning 100 cubic feet (often referred to a 1 Ccf) of natural gas.
.75 .83 cents about $1 a gallon.

Posted by: Rodney Brown at June 2, 2009 10:26 AM
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