Excellent as ever. Starting from the point that the 00s are like the 1920s, he goes on to say that we might be headed into something like the Great Depression. OK, not sure about this thesis, but let\’s take it that he\’s right. We should therefore be doing something different from what turned the Great Crash and the associated implosion of the banking system into that Great Depression, no? That is, not repeat the mistakes of last time around?
I know at least one central banker who spent the summer reading JK Galbraith\’s Great Crash. The first task of President Franklin D Roosevelt after his election in 1932 was the recapitalisation of the bankrupt American banks by new public agencies – which his Republican critics decried as socialism. But it pulled the US out of slump. Unless the western interbank markets start functioning again soon, the question will arise as to which governments are going to bail the western banks out of their foolishness. Will it be our own – or that of Mr Hu Jintao and the potentates of various oil producing Arab states?
Thus the conversation in Cape Town. Ominously, the first reaction to last week\’s injection of funds was a sell-off in the stock markets, but by Friday there were hopes that it might have delivered some short-term relief.
The British government should be heeding central bankers\’ concerns. It should be publicly announcing pre-emptive plans to support distressed mortgage holders and distressed lenders. It should be recasting the system of financial regulation, so that banks become tightly regulated, like utilities, as a quid pro quo for government guarantees of their deposits. Banks and building societies should be required to be much less reckless in their lending. The bill providing for the nationalisation of Northern Rock should be widened to include the other banks that will require short-term assistance. The UK should be pressing for a proper system of international financial governance and regulation.
Ah, no. Mr. Hutton is recommending that we follow exactly the same path as last time, the one that did in fact turn into the Great Depression. "Less reckless in their lending" equates exactly to a reduction in the money supply, to a restriction of credit.
Essentially, the Great Depression, in the monetarist view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman calls the "Great Contraction"— a period of falling income, prices, and employment caused by the choking effects of a restricted money supply.
Well done Willy!