Loading ...The nineties were a fascinating time for top-down macro analysis. The decade began with a severe banking crisis, the inevitable consequence of the late-eighties Bubble. The economy was in deep recession. The Greenspan Fed slashed rates and manipulated the yield curve, surreptitiously recapitalizing the banking system while nurturing non-bank Credit creation (securitizations, derivatives, hedge funds, the repo market and “Wall Street finance”). This wave of financial innovation came at a critical juncture, helping to finance massive Current Account Deficits, speculative excess and U.S. deindustrialization.
Throughout the decade, I was a devoted reader of the great German economist Kurt Richebacher’s monthly “The Richebacher Letter.” I became enamored with facets of the Austrian School of Economics – certainly its focus on Credit and economic structure. Dr. Richebacher was critical of the Fed’s interest-rate manipulation, U.S. over-consumption, persistent Current Account Deficits, and the dearth of productive capital investment (i.e. deindustrialization). Richebacher’s analysis resonates more today than ever.
Crazy, Dangerous Things have taken root in policy circles. Traditional norms are being tossed on the compost heap. Deficits don’t matter; the size of central bank balance sheets doesn’t matter; what central banks purchase doesn’t matter; money doesn’t matter. When I contemplate how we could have sunk to such a place, my thoughts return to Dallas Fed president Robert McTeer’s post-“tech” Bubble comment back in 2001… “If we all go join hands and buy an SUV, everything will be all right.” The following year Dr. Bernanke, with his government printing press and “helicopter money,” joined the Federal Open Market Committee.
Was the “Roaring Twenties” the “golden age of capitalism” or a historic Bubble? Was the Great Depression chiefly an inevitable consequence of boom-time financial and economic excess and deep structural impairment – as “Austrian” analysis holds? Or, instead, was the catastrophic downturn the consequence of policy negligence (tight monetary policy and then failure to aggressively expand the money supply after the 1929 crash) – as Bernanke and Milton Freidman analysis profess?