Times change, roots of crises remain

Kai Ryssdal Apr 4, 2008

Times change, roots of crises remain

Kai Ryssdal Apr 4, 2008


KAI RYSSDAL: I was trying to figure out the relationship the other day between the financial crisis everybody says we’re in today and THE financial crisis — the one that gives economists all the nightmares. And I found a book called “Essays on the Great Depression,” by a guy named Ben Bernanke.

I was thinking that since he’s the one who approved the $29 billion bailout of Bear Stearns, it’d be good to understand what he knows about keeping economies out of depressions.

Bernanke would be the first to tell you Wall Street’s the wrong place to start if you want to analyze what really happened to the economy 75 years ago. Yes, $14 billion went out the window the day of the crash. But the Dow Industrials actually rose through the rest of 1929 and into the spring of 1930.

Richard Sylla: It’s too easy to blame the Depression of the 1930’s on the stock market.

Richard Sylla’s a professor of economics at the Stern School of Business at NYU.

SYLLA: What really happened was later in 1930 there were lots of bank failures in the fall and the beginning of winter.

In the next three years, 7,000 U.S. banks failed. The blame belongs squarely with the central bank, says business historian John Steele Gordon.

JOHN STEELE GORDON: The Federal Reserve did nothing after the panic. I mean, it was fighting inflation when deflation had become the problem. It was, in effect, treating the patient for fever when the patient was freezing to death.

By the time Franklin Roosevelt was inaugurated one of every three banks in this country had been closed by state governments or had gone out of business entirely.

STEELE GORDON: In March 4th, 1933, things were about as bad as they could be in the United States.

Almost the first thing Roosevelt did when he got into the White House was close the rest of the banks. He explained why in his first Fireside Chat.

PRESIDENT ROOSEVELT: My friends, I want to talk for a few minutes with the people of the United States about banking. To talk with the comparatively few who understand the mechanics of banking. But more particularly with the overwhelming majority of you who use banks for the making of deposits and the drawing of checks.

This is where what happened back then gets us to where we are now. Roosevelt started the FDIC in 1933 to insure individual accounts. But we use banks today to do so much more than just make deposits and write checks.

Berkeley economist Barry Eichengreen says the rules haven’t changed enough since the New Deal to keep up.

BARRY EICHENGREEN: In the 1930s the problems were concentrated in the banking system, and the commercial banks in particular. Now, they’re primarily in what people refer to as the shadow banking system — the investment banks and the hedge funds. But the names have changed, I think the underlying problem is the same.

Opinion is split about whether or not Bernanke’s Federal Reserve should have helped JPMorgan bail out Bear Stearns. There’s not much disagreement, though, about what wouldn’ve happened if it hadn’t.

EICHENGREEN: Bear Stearns would have suspended operations on the Monday, and by freezing other people’s assets and collateral, which it held, questions would have arisen about the solvency, instability of other investment banks. And I think we could have seen the kind of financial market panic that has not occurred in the United States since the 1930’s.

Now that Bear’s been saved and we know the Fed’s out there willing to step in, could a panic like the one that fueled the Great Depression happen again?

NYU’s Richard Sylla says no, in part because of the guy who wrote that book I mentioned.

SYLLA: Nobody learned more from the experience of the Depression of the 1930s than Ben Bernanke.

Ask around among economists and you’ll get a fistful of different answers about how bad the current crisis really is. But they all say pretty much the same thing when you ask them where the next crisis is going to come from: Wall Street is full of really smart people.

STEELE GORDON: They’re always looking for new ways to earn money, and new ways to create wealth, and new ways to leverage — to use somebody else’s money to make money.

Make money despite what Bernanke and the Fed might do, and whether Congress and the Bush administration can agree on new regulations for the financial markets or not.

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