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Is This The New Great Depression?

May 13, 2011

wealthcycles

One of the precious few things that politicians, historians, and economists can all agree on is that policy makers blew it in the Great Depression. During the singular moment when they should have most allowed free markets to take care of things—they compounded them with protectionism, isolationism, taxes, and tariffs.

In this video, James Grant, of Grant’s Interest Rate Observer, and Liaquat Ahamed, Pulitzer Prize winning author of Lords of Finance discuss the legacy being left behind by the central bankers of today.

James Grant has been called a wingnut, but you can immediately sense that he has studied cycles and monetary history. Last year, in the New York Times, he wrote an article in which he criticized the Fed, and longed for the classical gold standard of yesteryear:

“Today, the Fed’s hundreds of Ph.D.’s conduct research at the frontiers of economic science.“The Two-Period Rational Inattention Model: Accelerations and Analyses” is the title of one of the treatises the monetary scholars have recently produced. “Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering” is another. You can’t blame the learned authors for preferring the life they lead to the careers they would have under a true-blue gold standard. Rather than writing monographs for each other, they would be standing behind a counter exchanging paper for gold and vice versa.”
“If only they gave it some thought, though, the economists — nothing if not smart — would fairly jump at the chance for counter duty. For a convertible currency is a sophisticated, self-contained information system. By choosing to hold it, or instead the gold that stands behind it, the people tell the central bank if it has issued too much money or too little. It’s democracy in money, rather than mandarin rule.”
“Today, it’s the mandarins at the Federal Reserve who decide what interest rate to impose, and what volume of currency to conjure.”

In the video, he makes this brilliant insight:

“The socialization of credit risk is part and parcel of our new age of finance.”

What kind of legacy do you think the Federal Reserve and other central banks are leaving behind, and do you think the future will look back on today’s policymakers with disdain?

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