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|
. | DISCOUNT
RATE BANK OF ENGLAND 1873 |
DISCOUNT
RATE FED 1929 |
DISCOUNT
RATE FED 2000 |
PEAK | 9% | 6% | 6% |
LOW | 2% | 1.5% | 1.25% |
Of critical interest is that the orthodox explanation of the 1930s' contraction is that Fed personnel made a mistake in raising rates from 5% to 6% in August, 1929 and then were not aggressive enough in lowering them afterward. Post-2000, the drop amounted to 475 basis points, which the establishment considers as an "emergency" decline, which is little different to the 450 bps post-1929.
By comparison, both were modest compared with the 700 bps plunge in the post-1873 experience. Of course, in the 1870s, financial reporting was sophisticated enough to understand that 9% represented an almost insatiable demand for money by speculators and eventually at 2% there was little demand for funds to speculate with. At the time, interest rates changed with the demand for funds as well as to maintain an adequate reserve behind the currency.
That was when London was the financial capital, but in New York, as it was then a junior financial market, anything was possible. At the height of the mania in 1873 and as signs of over-speculation were becoming evident to veteran traders, the leading newspaper editorialized that nothing could go wrong. It was argued and widely accepted that the Secretary of the Treasury had a greater ability to prevent a contraction than a mere central banker, who was limited by the gold standard. The theory was that the Treasury could buy enough treasuries out of the market to keep the boom going.
History has never long abided the policy theory that prevailed during a financial mania and this brings us to just what kind of an Armageddon is possible in a post-bubble world. The theories that financial bubbles can be sustained have had a short shelf life, as should those who insist that a contraction can be prevented by yet more issue of credit.
First, it is important to note that one of the most violent financial Armageddons was the Weimar inflation that was imposed upon Germany by their policymakers in the early 1920s. At the same time, Lenin intentionally employed the same method to destroy the middle class in Russia. Both were printing press inflations that can be argued as impossible to do in a credit-based economy such as the U.S. The paper examples resulted in Communism and National Socialism, which were labels for a horrendous political Armageddon inflicted upon society.
Using the history of England and America, it seems that the most violent abuses of the credit markets resulted in an equally violent loss of esteem by the prevailing theory during the financial mania.
In 1873, the Treasury System was touted as proof against contraction. With the occasional cyclical relief, the contraction lasted from 1873 to 1895 and was analyzed as "The Great Depression" until as late as 1940 when a more immediate one was discovered.
By 1900, the establishment had convinced itself that the "old" Treasury System was a breeder of booms and busts and that a modern central bank was needed. But as some memory remained of earlier condemnation of central banking, the term Federal Reserve System was used instead.
Then the higher the Dow went in the late 1920s, the more the abilities of the Fed were touted. A wonderfully ironic observation was made in 1931 by Alexander Dana Noyes, the venerable financial editor of the new York Times: "[The speculative 1901 bull market assumed] that we were living in a new era; that the old rules and principles and precedent of finance were obsolete; that things could safely be done today which had been dangerous or impossible in the past. The illusion seized on the public mind in 1901 quite as firmly as it did in 1929. It differed only in the fact that there were no college professors in 1901 who preached the popular illusion as their new political economy." (Noyes, as a young reporter, covered the 1884 panic).
The irony continues with Alan Greenspan's essays in 1966 condemning the Fed's reckless ease in the 1920s in exacerbating that bubble, which exacerbated the consequent contraction.
Booms, busts, and lengthy contractions have been regular events and there has been no sound reason to propose that some policymakers or central bankers can materially alter financial history. This has been one of the blunders of those who thought that the prevailing agency could keep a financial mania going beyond its standard duration of 9 years.
Beyond the sudden loss of prosperity has been the "Armageddon" of the sudden loss of prestige that goes with a post-bubble contraction.
Celebrated as a financial genius during the Mississippi Bubble of 1720, John Law was fortunate to escape France with his life during the intense recrimination during consequent contraction. During the 1920s' financial mania, Andrew Mellon was celebrated as "the greatest Treasury Secretary since Alexander Hamilton." He has been condemned ever since as one who allowed the 1930s' contraction to happen.
Of course, during the late 1990s' mania, Treasury Secretary Robert Rubin was celebrated as the greatest since Alexander Hamilton. He wisely retired from the position before the top with his posterity intact. (With great futility, the Rubin-Summers Treasury was ostentatiously buying bonds in late 1999 - early 2000).
However, whatever the reputation, Armageddon that could be visited upon the usual policymaker who overstays his role could be just a personal part of the much bigger picture - whether taxpayers like it or not, the full faith and credit of the U.S. (so to speak) has been employed to inflate any asset price that could be boosted.
Other than personal loss of prestige or a more widespread loss of prosperity, the worst Armageddon that can be considered is the typical collapse in esteem for the "genius" of the theories attendant to the speculative mania. In the late 1980s, it was the collapse of socialist central planning in Eastern Europe. On the next contraction, Western central planners will likely suffer a massive loss of regard and, hopefully, arbitrary power.
Armageddon for them; eventually, financial blessings for the general public.
Bob Hoye
Institutional Advisors
E-mail bobhoye@institutionaladvisors.com
Website: www.institutionaladvisors.com
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