On Sat, Feb 21, 2009 at 6:57 PM, David B. Shemano <[email protected]> wrote: > I totally dispute this. The ten-year US depression was not caused by > following the recommendations of Andrew Mellon. If he had been listened to > instead of indicted, the world would have been a much better place. >
http://www.atimes.com/atimes/Global_Economy/KB19Dj02.html ----------------------------------------snip In December 1929, as what we now know to have been the Great Depression loomed, Mellon outlined his formula for fighting recession, which had worked well in the previous episode of 1920-21. "Liquidate labor, liquidate stocks, liquidate the 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.'' Mellon then foolishly remained at Treasury until 1932, a powerless spectator of the opposite approach taken by president Herbert Hoover, tarnishing his reputation for the rest of his lifetime and beyond. There are a couple of points in Mellon's prognosis that have resonance today. "Purging the rottenness out of the system" is precisely what's required to sort out the banking mess, while "leading a more moral life" is fairly clearly also required after the over-consumption and excess of the bubble period. "High costs of living and high living will come down" is, however, directly contrary to the Keynesian majority view, which holds that deflation is the most serious possibility to fear, and that restoring consumption through government spending is a prime objective. [...] The really interesting question is: what would Andrew Mellon have done if appointed Treasury secretary in, say, June 2008, with the bubble already burst, oil at $147 per barrel, house prices declining rapidly and Bear Stearns already "rescued". At that point, he would have been parachuted into a crisis situation, even if the full dimensions of that crisis were not yet fully apparent. Being sophisticated about financial markets, Mellon might well have picked up the negative whirlpool that was sucking down Lehman Brothers once Bear Stearns had been forcibly "rescued". It's doubtful, however, whether he could have done much with that knowledge; there were simply too few private sector rescuers available for Lehman. Mellon would certainly have made no attempt to rescue AIG, or to prop up the credit default swap (CDS) market once the AIG bankruptcy had produced losses for all its counterparts that were "long" CDSs. He would have recognized that CDSs were a deeply flawed product, whose settlement was completely arbitrary, and would thus have rejoiced in the destruction to the CDS market inflicted by AIG's bankruptcy. There would have been no need for legislation to ban CDSs; the market would have been killed or at least greatly reduced in size by the losses to counterparties from that bankruptcy. What's more, US taxpayers would have been $150 billion better off. Most losses from CDSs that suddenly proved worthless would have been borne by the hedge fund community, although there would doubtless also have been losses to the more aggressive banks and investment banks, some of which were doomed anyway. [...] Thus, by not funding TARP, Mellon would have caused up to five additional major financial institutions to go under between September and December 2008. The remainder of the banking system would have been as solid as it is in the current reality, provided that the additional bankruptcies did not themselves cause a crisis of confidence in US banks sufficient to set off a general default. However, the Fed would have continued to supply lavish credit to the system, as it did in reality, and the surviving banks would have worked together under Mellon's guidance to contain the payment and loss problems caused by Citigroup and Wachovia's demise, as the New York banks did under JP Morgan's guidance in 1907. We cannot know whether the crisis of September-December 2008 would have been worse under a Mellon solution (though the real-world widening of credit spreads after TARP was announced indicates that it might not have been). But by now, the worst of the banking system's problems would be behind us. Had Mellon been appointed in June 2008, he would presumably have left office with the change of administration in January 2009, leaving us with the likelihood of an Obama-led stimulus package, but no great risk of Geithner's new $1.5 trillion bailout scheme, since the credit markets would already be recovering, minus several banks but without the necessity of a TARP. Fannie Mae, Freddie Mac and the credit default swap market would have been euthanized, to the enormous benefit of the US and global economies going forward. Alternatively, had Mellon, in a moment of bipartisanship gone mad, instead been appointed Treasury secretary last month by the incoming Obama, he would have concluded from the Congressional Budget Office's January forecast of a 2009 budget deficit of $1.19 trillion that the appropriate size for a stimulus package was approximately MINUS $800 billion. Spending cuts would be front-loaded as much as possible to relieve the strain on the debt markets and allow the private sector to resume raising finance. Going through the federal budget, he would have found plenty of items to cut, indeed several Cabinet departments to abolish, though he could also have bribed the congressional left by closing down much of the United States' international defense activity. -raghu. -- I get mail........ therefore I am. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
