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Taking Stock

Taking Stock: Lessons from history

Kai Ryssdal Jun 9, 2009
Taking Stock

Taking Stock: Lessons from history

Kai Ryssdal Jun 9, 2009

Kai Ryssdal: Today we’re going to pick up with our series Taking Stock, occasional conversations with people who can give us the long view of our current economic situation.

There aren’t many people around today who can give us that perspective better than Anna Schwartz. She’s 93 years old, an economist for more than 60 of them. Still working, every day, at the National Bureau of Economic Research in New York City. Her area of expertise is monetary policy, how much money is in the economy, usually controlled by the interest rates that the Federal Reserve sets. Specifically, she’s an expert in how the Fed blew it during the Great Depression, when customer after customer pulled their money out of the banks.

Anna Schwartz: The Federal Reserve could easily have provided additional money supply. That would have helped the banks that were losing deposits and that would have helped the economy in general.

Forty-six years ago Schwartz, and a guy named Milton Friedman, who’d later go on to win the Nobel Prize for economics, wrote a book on the topic. It was called “A Monetary History of the United States.” It’s on just about every list of the most important books on economic history… ever. When I sat down with her in her office in Manhattan last month, she made it clear she’s none too happy about all of Washington’s bailouts, or how the Fed and the Treasury chose who got one and who didn’t.

Schwartz: I think both Bush and the Obama administration have not been as hard headed with banks, it has been too lax. And instead if they had said if you cannot raise capital in the market, there is no reason for the government, the people of this country, to provide capital.

Ryssdal: OK, but wait a minute. Didn’t we try that with Lehman Brothers last September? And there are people who will say that only made everything worse. Should we now say to Bank of America, and Citigroup and some of these other banks, “Hey, you can’t make your loans…”

Schwartz: No, the trouble with the way the Fed operated when it rescued Bear Stearns, the market then believed this was a signal of the way the Federal Reserve would perform. If the Fed and the Treasury made a candid statement to the market: We will help a bank, which basically is solvent. We will not do that for a bank, which is on the verge of bankruptcy. And then the market understands there are principles. That’s why when Lehman Brothers was permitted to fail, the market was simply bewildered. Because here you had treated Bear Stearns in this kindly fashion, and what reason was there not to do the same when Lehman Brothers arose?

Ryssdal: Now do you think the market has figured out what the policy of the federal government is toward these rescues by now? It’s been six, seven months since Lehman Brothers.

Schwartz: The market is just bewildered. Bernanke came into office insisting that the Fed would be much more transparent than it had been in the past. But I don’t believe that it’s lived up to that. If the market understood what the Fed was planning in each case, and could see a design, then I think the market would have reacted much more positively.

Ryssdal: It sounds like you’re frustrated with Chairman Bernanke and the White House, that they maybe haven’t learned the lessons of history that you and Milton Friedman wrote about.

Schwartz: Well, I think that that’s a fair statement. Considering Bernanke’s background, you would have expected a much more, should I say a tidy kind of performance by the Federal Reserve. Seemed to be something that was ad hoc and introduced without considering all the implications.

Ryssdal: You know, Alan Greenspan was lionized in this country for many years. And then a year ago went up to Capitol Hill and said, “You know what, I blew it.” Does he get the appropriate amount of credit and/or blame for this whole thing?

Schwartz: Well, I think the verdict of history will be different with regard to his stature than it has been so far.

Ryssdal: In your mind, these toxic assets, the bad assets that these banks still have on their books, are they still a big problem or have they worked their way through the system now?

Schwartz: No, and I think the big shortcoming of the Obama administration, and Bush before that, was that it didn’t make a concerted effort to get rid of these assets. I mean in a sense it’s a condemnation of the Federal Reserve. They did not respond to securitization, which is the basic condition for the creation of these toxic assets. Neither Alan Greenspan or anybody else at the Fed seemed to be concerned.

Ryssdal: Securitization, that is the buying and selling of these packages of mortgages. There are those who will say it contributed a lot to the economic growth in this country. Do you buy that?

Schwartz: Well, I suppose the people who made money on it will say, Sure. But you have to be able to divine what you’re letting yourself in for, if you’re going to permit securitization to go on. And nobody took action to say, “Wait a minute. What are we doing when we are permitting these mortgage companies to issue these securities backed by a pool of mortgages of varying quality, and you don’t know how to price the security?” Nobody raised that question.

Ryssdal: When an economic historian comes along in 25 or 30 years and tries to do for this episode what you and Professor Friedman did for the Great Depression, what’s their verdict going to be on the monetary policy that the Fed has been following?

Schwartz: Well, there has not been a straight line in the programs that the Fed has introduced over this period. So, I don’t know whether the verdict will be charitable. It’s always possible to find reasons why other alternatives were not really available. But I think on the whole the performance has been disappointing. Because now two years and more after Bernanke came into office we don’t see visible signs of change for the better.

Ryssdal: Dr. Anna Schwartz. She’s an economist with the National Bureau of Economic Research, has been since 1941. She’s also the co-author, with Milton Friedman, of “A Monetary History of the United States.”

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