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Posted: November 05, 2008

Lessons of the Great Depression

Future painful day of reckoning?

Rebecca Cole

"Washington was rife with both fear and optimism as Roosevelt was sworn in on March 4, 1933 - fear that the economy might not recover and optimism that the new and assertive president just might make a difference." -- Myths of the Great Depression, Lawrence Reed

Nearly every article written recently about the economic meltdown usually contains the phrase, "the worst financial crisis since the Great Depression" to describe the current state of affairs.

Last month, Lawrence Reed, president of the Foundation for Economic Education, a free-market think-tank, drew parallels between today’s crisis and what he terms the "myths" of the Great Depression.

"If we ignore history, we will be condemned to repeat it," Reed told a crowd of about 75 undergraduates and guests at Colorado Christian University in Lakewood. "I’d like to say the Federal Reserve has learned from the Great Depression, but maybe not all the lessons."

Reed said the years of expansion in the 1920’s were caused primarily by the Fed’s "disastrous mismanagement" of monetary policy. Driving interest rates to historic lows ensured bloated liquidity and created an artificial short-term boom. As commodity prices skyrocketed and the dollar plunged, it all came crashing down on October 24, 1929.

Sound familiar?

In today’s global financial crash, initial finger-pointing was aimed at greedy Wall Street investment banks that peddled chopped-up mortgage securities and credit default swaps around the world. But now former Fed chairman Alan Greenspan is in the hot seat for keeping interest rates too low for too long and fueling the housing boom at the root of the financial mess.

The real danger, Reed said, is if the new administration makes the kind of monetary mistakes he says a "silver-tongued" President Franklin Roosevelt made with his New Deal policies — doubling the tax rate for those in the top bracket, raising tariffs, implementing price controls and choking the monetary supply — that turned a recession into a severe and prolonged depression.

"Speeches are no substitute for good policy, as the 1930s demonstrated," Reed said. "FDR could give a fireside chat like no other. But if the policies are bad, they will not restore confidence."

Blasting the Bush administration’s bailout mentality, Reed said it amounts to nothing more than a short-term stimulus.

"Debts aren’t disappearing; they’re only getting transferred," he said. "We’re not removing malfeasance in this behavior; we’re subsidizing it. In the short run, it may make you feel good, but in the long run there’s a piper to be paid."

Calling for a "quick and healthy adjustment," Reed said any effort to forestall an inevitable correction is only going to "put the day of reckoning off" and make it more painful in the future. "There’s a cleansing that takes place when markets are allowed to go to where values really are. When we prevent that cleansing, we just prop up the system for a more painful future correction."

Reed said the Bush administration is "a disaster on the spending front, one of the worst in our history," and that he’s not happy with either of the possible replacements. With the election over and Sen. Barack Obama declared the winner, he will inherit a record $455 billion deficit — doubled from its level at $162 billion just one year ago — and an overall national debt north of $10 trillion.

"There needs to be less government meddling and more personal responsibility," Reed said.

Tucker Hart Adams, president of the Adams Group, who has monitored and analyzed the Colorado economy for 30 years, agrees with Reed’s analysis to some extent in terms of personal responsibility. "Nobody wants to say it’s our fault, as a country, as individuals, for trying to live beyond our means as we have done for several decades, and it has just gotten worse and worse."

But Hart Adams disagreed with Reed on the $700 billion rescue plan and said there is a clear place for government regulation, especially in terms of transparency. "Markets work when you have perfect information. We didn’t have that, and nobody cared, nobody asked."

To step back and let the market chart its own course, she said, would cause horrible suffering — and with the interconnected global economy, not just here in the U.S — that could be prevented.

"We need jobs, we need people paying taxes, we need goods and services produced," Hart Adams said. "And if we have to smooth the transition period in order to not have bread lines and 25 percent unemployment I think that’s a valid role for government.

"We’re going to have to pay one way or the other, unless we’re going to just say, ‘Let ’em starve,’" she said.

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Rebecca Cole is the online editor at Rocky Mountain Institute, a non-profit "think-and-do" tank that drives the efficient use of energy and resources. Learn more about RMI's latest initiative, Reinventing Fire, to move the U.S. off fossil fuels by 2050.

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