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Housing was the problem in the Depression

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March 31, 2008 – Comments (9)

A lot of people have a mistaken belief that the stock market crash of 29 was what lead into the Great Depression, but the problem was housing, not the stock market.

I have been consistent in my view that when I look at household debt, and when I did an analysis of the the lesser ability to get control when you are maxed out on low interest debt as opposed to high interest debt, well, I have been able to see how consumers manage to keep spending, hence my highly bearish perspective.

Safehaven had a post with a piece of historical date that I thought I'd share: 

" "Real-estate loans, not failed stockbrokers' accounts, were the largest single element in the failure of 4,800 banks in the years from 1930 to 1933." Homer Hoyt. One Hundred Years of Land Values in Chicago. "

9 Comments – Post Your Own

#1) On March 31, 2008 at 8:31 PM, dwot (45.58) wrote:

wcaseywm has found a good blog.

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#2) On March 31, 2008 at 8:37 PM, abitare (45.58) wrote:

wikipedia:

Another explanation comes from the Austrian School of economics. Austrian theorists who wrote about the Depression include Hayek and Murray Rothbard, who wrote "America's Great Depression" in 1963. In their view, the key cause of the Depression was the expansion of the money supply in the 1920s that lead to an unsustainable credit driven boom. In their view, the Federal Reserve, which was created in 1913, shoulders much of the blame.

In fact, Hayek, writing for the Austrian Institute of Economic Research Report in February 1929 [13] predicted the economic downturn, stating that "the boom will collapse within the next few months."

Ludwig von Mises also expected this financial catastrophe, and is quoted as stating "A great crash is coming, and I don't want my name in any way connected with it" [14] when he turned down an important job at the Kreditanstalt Bank in early 1929.

One reason for the monetary inflation was to help Great Britain, which, in the 1920s, was struggling with its plans to return to the gold standard at pre-war (World War I) parity. Returning to the gold standard at this rate meant that the British economy was facing deflationary pressure.[15] According to Rothbard, the lack of price flexibility in Britain meant that unemployment shot up, and the American government was asked to help. The United States was receiving a net inflow of gold and inflated further in order to help Britain return to the gold standard. Montagu Norman, head of the Bank of England, had an especially good relationship with Benjamin Strong, the de facto head of the Federal Reserve. Norman pressured the heads of the central banks of France and Germany to inflate as well, but unlike Strong, they refused.[16] Rothbard says American inflation was meant to allow Britain to inflate as well, because under the gold standard, Britain could not inflate on its own.

In the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and in capital goods. By the time the Fed belatedly tightened in 1928, it was far too late and, in the Austrian view, a depression was inevitable.

The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. According to Rothbard, government intervention delayed the market’s adjustment and made the road to complete recovery more difficult.[17]

Furthermore, Rothbard criticizes Milton Friedman's assertion that the central bank failed to inflate the supply of money. Rothbard asserts that the Federal Reserve purchased $1.1 billion of government securities from February to July 1932 which raised its total holding to $1.8 billion. Total bank reserves only rose by $212 million, but Rothbard argues that this was because the American populace lost faith in the banking system and began hoarding more cash, a factor very much beyond the control of the Central Bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, and, Rothbard argues, was the cause of the Federal Reserve's inability to inflate.[18]

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#3) On March 31, 2008 at 9:24 PM, dwot (45.58) wrote:

I have read Austrian Economics and I great respect for them.  That would be the same thing, they had a housing bubble due to credit.  I think the lending standards were stronger than today's lending standards because they had 15 year mortgages.

Sometimes I wonder if we aren't going end up more screwed than the Depression because I think the debt burden is higher and there are less options. 

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#4) On March 31, 2008 at 9:30 PM, dwot (45.58) wrote:

Merck has some good news on a weight loss drug.  I think Merck is too big and has too many drugs due to be sold generically for one drug to make up for it, but the results are promising.

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#5) On March 31, 2008 at 9:35 PM, abitare (45.58) wrote:

dwot - check out abitareperfects blog on quotes Depression vs Housing bubble quotes

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#6) On March 31, 2008 at 11:05 PM, dwot (45.58) wrote:

Link?

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#7) On April 01, 2008 at 8:47 AM, abitare (45.58) wrote:

Housing Bubble vs. Great Depression Quotes

abitareperfect -  

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#8) On April 01, 2008 at 9:14 AM, dwot (45.58) wrote:

Thanks.

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#9) On April 01, 2008 at 9:14 AM, dwot (45.58) wrote:

The link did not work.

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