The Difference Between '29 and '08

Wednesday, October 22, 2008
When the financial apocalypse befalls the world in a few months, be sure to thank Milton Friedman, the libertarian economist.

In the 60s, he revised our notions of what caused the Great Depression. It wasn't speculation on the stock market, which would've fizzled down harmlessly. Instead, he said, it was the catastrophic government intervention afterward.

The Federal Reserve tightened the money supply after the stock market crash. Milton Friedman made it orthodoxy to believe that the Fed's tightening put the economy in a depression. Don't blame speculative capitalism, blame government.

Using Milton Friedman's model, the Federal government is doing the absolute opposite of what it did in the 20s: it's printing trillions of dollars, borrowing trillions of dollars, lending trillions of dollars to the banks and speculators. It's leveraging itself. Just as the corporations and banks and whatnot leveraged themselves prior to this crash.

In the short run, this will avert a worse stock market panic and a plague of defaults. In the long-run, it will bankrupt the Federal Government.

The Feds get a bad rap for their actions after 29. But maybe they were sparing us an Apocalypse at the cost of a Depression. (And now the Feds are sparing us a Depression at the cost of an Apocalypse.)

SIDE NOTE: For a real view on the Depression, read Galbraith's 'The Great Crash: 1929.' It was the basis for my January, Facebook-blog prediction that we're headed into a Depression.