[Marxism] Daily Telegraph columnist: Bact to 1931, but not 1933 yet

["Fred Feldman" <ffeldman@xxxxxxxxxxxxxxxx>]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4339501/Ba
d-news-were-back-to-1931.-Good-news-its-not-1933-yet.html

Bad news: we're back to 1931. Good news: it's not 1933 yet
Barack Obama inherits an economy already contracting at an annual rate of
6pc, much like the mid-Depression year of 1931 (-6.4pc), writes Ambrose
Evans-Pritchard 
 
By Ambrose Evans-Pritchard
Last Updated: 8:38AM GMT 26 Jan 2009

Comments 32 | Comment on this article

This may beat Germany (-7pc) Japan (-12pc) and Korea (-22pc) over the fourth
quarter. But that merely underlines the dangers ahead as the collapse of
global trade chokes the mini-boom in US exports, setting off another stage
of the crisis. 

The US is losing 500,000 jobs a month. Brazil lost 650,000 in December.
Beijing says 10m Chinese have lost their jobs since the crunch began.
Japan's exports fell 35pc last month, year-on-year. The central bank is
printing money furiously, buying bonds to prevent a relapse into deflation. 

So yes, it is like early 1931. Citigroup and Bank of America have more or
less disintegrated. JP Morgan's health is failing fast. General Motors and
Chrysler survive only on life-support from the US taxpayer. 

But it is not yet like 1933. That second leg down was the result of
"liquidation" policies by a Dickensian leadership blind to the dangers of
debt deflation. By then the Gold Standard had degenerated into an instrument
of torture. It forced the Fed to raise rates from 1.5pc to 3.5pc in October
1931 to stem gold loss, with predictable results for shattered banks. 

It is worth glancing at the front page of New York Times on Monday March 6,
1933 to see what the world looked like three days after Franklin Roosevelt
moved into the White House. 

The newspaper splashed with the story that FDR had closed the US banking
system - invoking the Trading with Enemies Act - and ordered the
confiscation of private gold. From left to right, the headlines read:
"Hitler Bloc Wins A Reich Majority, Rules Prussia"; "Japanese Push On In
Fierce Fighting, China Closes Wall, Nanking Admits Defeat"; "City Scrip To
Replace Currency"; "President Takes Steps Under Sweeping Law of War Time";
"Prison For Gold Hoarders". 

President Obama faces a happier world. The liberal economic order is still
in tact, if fraying at the edges. Capital and ships move freely. North
America and Europe talk the same political language. China has so far proved
a dependable pillar of the international system. 

But then the world seemed benign enough in early 1931. It is the second
phase of depression that does terrible things. 

Roosevelt took over a country where the economic machinery had completely
broken down. The New York Stock Exchange and the Chicago Board of Trade had
closed. Thirty-two states had shut their banks. Texas had restricted
withdrawals to $10 a day. 

Few states could borrow on the bond markets. Illinois and much of the South
had stopped paying teachers. Schools closed for months. An army of 25,000
famished war veterans squatting in view of Congress had been charged by
troopers of the 3rd US cavalry with naked sabres - led by a Major George
Patton. 

Armed farmers threatening revolution had laid siege to a string or Prairie
cities. A mob had stormed the Nebraska Capitol. Minnesota's governor was
recruiting Communists only for the state militia. Lawyers attempting to
enforce foreclosures were shot. More than 100,000 New Yorkers applied to go
to the Soviet Union when Moscow advertised for 6,000 skilled workers. 

We forget how close America came to open revolt. Eleanor Roosevelt feared
the country was beyond saving. Her husband kept the faith. He channelled the
anger against Wall Street, diffusing it. "The practices of the unscrupulous
money-changers stand indicted in the court of public opinion," he began his
presidency. 

The Fed was an ideological deadweight. Bowing to pressure from Congress it
began to purchase bonds in mid-1932 to boost the money supply, but then
recoiled, before retreating into pitiful self-justification. A third of the
rescue funds in Hoover's Reconstruction Finance Corporation had been
embezzled. 

Today there has been no such failure of US institutional imagination, even
if, as George Soros argues, the Treasury's policies have been "haphazard and
capricious". 

The twin blasts of fiscal and monetary stimulus have been massive. In short
order the Fed has slashed rates to zero. It is now conjuring money out of
thin air on an industrial scale, buying $600bn of mortgage bonds to force
down the cost of home loans, and propping up the commercial paper market to
avoid mass corporate default. Ben Bernanke, a Depression junkie, is
proceeding with a messianic sense of certainty. The wash of money should
ensure that the next 18 months will not mimic the cascade of disasters from
late 1931 to early 1933. 

It buys time. But it does not solve the deeper problem, which is that a West
addicted to Ponzi credit has put off the day of reckoning with ever more
extreme monetary policy with each downturn, stealing prosperity from the
future. 

It will be an extremely delicate task to right the ship again. Central banks
will have to extricate themselves from their venture into the bond markets
without setting off a bond debacle in 2010 or 2011. Governments will have to
map out of a path of Puritan discipline for year after year. 

This will be Barack Obama's grim test of statesmanship.



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