by David Stockman, International Man:
Oh, puleese!
Ben Bernanke got the Nobel Prize for his early 1980s work on, well, why banks exist!
That’s right. What all students of banking knew 100 years ago—-that banks are inherently risky because they lend long and borrow short—got gussied up into a fancy theory of “maturity transformation”, and a further claim that the severity of the Great Depression was owing to the failure of maturity transformation in the private banking market.
TRUTH LIVES on at https://sgtreport.tv/
That proposition, of course, implies that banks and other financial intermediaries are inherently defective and need the helping hand of the central bank to ameliorate their mistakes. Or as Fed and Bernanke fanboy Greg Ip wrote in the WSJ this AM:
In a seminal 1983 paper, Mr. Bernanke showed that the depth and length of the Great Depression was due in great part to financial factors: As the economy contracted and deflation took hold, banks failed, taking with them knowledge about borrowers that had been critical to sustaining credit.
Mr. Bernanke added another crucial insight: Lenders, he noted, dealt with information asymmetry by demanding collateral, such as property, that can be seized if the loan isn’t repaid. If collateral values are falling, even sound banks might not want to lend. The 1930-33 debt crisis was due to “the progressive erosion of borrowers’ collateral relative to debt burdens,” Mr. Bernanke wrote. The usual response of banks was “just not to make loans to some people that they might have…in better times.”
Well, good on them per the last bolded sentence, and bad on the Nobel committee and the modern guild of economic professors for promoting the opposite humbug.
The Great Depression was not caused by “market failures” such as deficient maturity transformation, nor the reluctance of the Fed back in those times to flood the market with fiat credit, as did Bernanke 78 years later. To the contrary, the Great Depression amounted to a vast purge of the credit excesses and bad loans that had been made during the false prosperity of the Great War, exacerbated by the easy credit policies of the Fed during the mid-1920s thru the crash of October 1929.
Yes, commercial bank deposits did shrink by 26% after the crash—-from $46 billion to $34 billion between 1929 and 1933. But that was due to the liquidation of bad loans made during the prior 15 years of unsustainable prosperity. During that period, the US first experienced a credit-fueled economic boom as it became the wartime arsenal and granary of the European Allies; and then another huge leg up during the 1920’s when Wall Street made massive foreign loans, which fueled booming exports and domestic CapEx.
Alas, the party eventually came to an end when these massive foreign loans—upwards of $1.5 trillion in today’s economic scale—which had been taken out by foreign governments and private companies alike could not be serviced.
So Bernanke was half-right, but had the time period upside down: To wit, the culprit was not timid central bank policy during 1929-1933 when the excesses of the prior booms were being necessarily and unavoidably liquidated. Instead, the Fed’s policy error was that it had financed an unsustainable wartime boom during 1915-1919, and then added insult to injury by fueling the foreign lending and stock market bubbles of the 1920s, which came crashing down in 1929—pulling the props out from under the Roaring Twenties.
What didn’t happen during 1929-1933, however, was a too stingy Fed as Milton Friedman and his acolyte Ben Bernanke have insisted. While the money supply (M1) shrank by -7% per year during that period of deep contraction, the Fed’s balance sheet—a measure of its credit support to the financial system—grew by +8% per annum.
What really caused the Great Depression, therefore, was the collapse of the money multiplier, thereby severing the alleged constant relationship between Fed credit (reserve provision) and M1. Yet the money multiplier’s collapse was not evidence of a “market failure”, but embodied a necessary and healthy market purge. After all, when bad loans are liquidated, bank deposit money gets destroyed as well.
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