When Milton Friedman and Anna Schwarz wrote about the Great Depression, their major point was the total absence of growth of the so-called monetary aggregates (money supply, monetary base, etc.) between 1929 and 1933. Well, the economist John Rutledge – in his very interesting blog – is raising the same point again:
“The Fed’s job is to provide liquidity. Instead, they diverted their energies to propping up troubled banks and investment banks by extending massive loans to institutions that were never eligible before. At the same time, they adopted procedures to sterilize the resulting reserve increases by selling T-bills in the open market to suck the additional reserves back out of the market. The net result was simply to shift bank reserves from healthy banks that were making loans to their customers to the sick ones. Total reserves did not go up at all. The monetary base has not grown in the past year. The Fed’s balance sheet has imploded. The upshot of all this is the Fed has provided no liquidity whatsoever and we have had one crisis after another. The FOMC statement, in writing about the balanced risks of growth and inflation shows they do not have a clue what is wrong with the system. The Fed does not print oil and should not chase growth-induced commodity price swings up and down with monetary policy. We don’t have an inflation–housing prices–the largest asset class for every American family–are still falling. It is time for the Fed to wake up and stabilize the capital markets.”
It seems that – just like in the 1930’s – the Federal Reserve is too worried about inflation and does not understand that one thing is to raise the money supply and the monetary base in order to generate life in the economy, and another thing totally different is to inject liquidity and then sterilize this new liquidity by selling Treasury bills and Treasury bonds.
Perhaps Ben Bernanke – who is considered an expert on the Great Depression – does not believe in the major argument of the Friedman and Schwarz book on the Great Depression.
Over and above that, one should also call attention to the writings of Hyman Minsky. His financial instability hypothesis raises a very interesting question: Why is it that it took almost 75 years for the bank financing methods to become again equal to a Ponzi scheme? Why is it that between 1945 and 2005 (60 years) we had a golden age without systemic crises?
Hyman Minsky and John Rutledge have written very important articles and studies about money and credit which confirm many of the preoccupations manifested in this blog in the past few months by Nouriel Roubini.