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How to make a depression - FDR showed the way Take the Depression quiz!

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December 20, 2008 – Comments (6)

Taken from Vox Day:

How to make a depression

FDR showed the way:

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt. After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

This is interesting news that happens to be highly relevant, as Voxiversity II is going to be reading and discussing Murray Rothbard's America's Great Depression. We'll start the readings on Monday the 27th, but if you want to get an early jump you can download the entire book on PDF or bookmark the online text at the Mises Institute. However, Voxiversity I participants tended to find having the physical text on hand to be helpful, so you may wish to consider ordering the book from the Mises bookstore.

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America's Great Depression - Chapter 1

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6 Comments – Post Your Own

#1) On December 20, 2008 at 9:18 PM, abitare (36.89) wrote:

Book can be downloaded here:

http://mises.org/rothbard/agd/contents.asp 

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#2) On December 20, 2008 at 11:23 PM, OtherOracleOfOMA (31.21) wrote:

Interesting how the FDR-haters simply ignore any inconvenient facts, like how recovery began relatively quickly after he took office and that his first two terms saw the most rapid peacetime GDP growth in American history. Certainly, he did a lot of things wrong (the program to plow under crops while people couldn't afford food was particularly hair-brained), but his policies were a vast improvement over his predecessor's.

It's also quite misleading to insinuate that the amount of time the depression lasted is the fault of FDR's administration. Recovery always takes longer than the preceding bust; this asymmetric shape is a function of the role credit plays in the economy.  Specifically, this owes to the phenomenon of reflexivity - the tendancy for asset prices in certain circumstances of market disequilibrium to affect the so-called "fundamentals" of the underlying assets. Thus, the boom develops slowly and accelerates rapidly; as prices rise, the same collateral can support a greater amount of credit. At the peak of the boom, the market price of capital and the degree of leverage reach their peak. The degree of overshoot may be minor, or it may (in the case of our current crisis) be so spectacular as to astonish those not caught up in the boom.

Eventually, the resulting misallocation of capital reaches a point in which the reality is so glaring that it can no longer be ignored. As the price trend reverses, market actors are vulnerable to margin calls and forced deleveraging. The resulting forced liquidation of capital sends asset prices sharply downwards; in rare cases, the downwards acceleration becomes unsustainbly rapid, and the economy is sent into a tailspin.

Getting back to FDR, investment and thus growth resumed in the last quarter of 1933, which was followed by 11%, 9%, and 13% GDP growth in 1934, '35, and '36 respectively. This is by far the most rapid 3-year period of growth in American history, and is partially explained by the catastrophic deflation from 1929-1933, which sent asset prices well below asset values due to the slump in demand. Of course, he tried to then balance the budget too rapidly, and we went back in to a recession in the last half of 1937.

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#3) On December 21, 2008 at 12:57 AM, Option1307 (30.18) wrote:

You're right, his policies were excellant and were completely awesome for our country. Nevermind the fact that we remained in a significant downturn until that small event occured, WWII, that finally restore our economic might...

Interesteing take on things you have thoguh. I respectfully disagree though.

Check out Amity Shales book "The Forgotten Man"... It's a really interesting novel describing FDR's policies and how they turned a bad recession into the Great Depression. I realize it will not change your mind, but its interesting nonetheless.

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#4) On December 21, 2008 at 1:52 AM, starbucks4ever (96.30) wrote:

FDR simply continued what Hoover has started, and was able to take credit for it by being in the right place at the right time (this is what's happening to Obama now). But what was the right thing then is precisely the wrong thing today. Because back then, cheap credit was performing a useful function: it was helping capitalists start up more factories, builders - to build more houses, and farmers - to buy more tractors. Today, the situation is exactly the opposite: industrialists, builders, and farmers can only dream about getting rid of leeches from the bloated financial sector, and the only people crying for more liquidity are those who would like to make a living by standing in the way of industrial production, building, and raising crops. I say, withdraw the liquidity, destroy the financial sector, and let the econonomy stage a real recovery, the one that would function in a no-BS mode.

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#5) On December 21, 2008 at 11:52 AM, XTMFCaptain (< 20) wrote:

I am glad to see FDR's policies (and Hoover's before him) refuted to show he extended the Depression.  We had several similar depressions/recessions/credit crisis before the 30s (1896, 1907, and 1920). In each of these periods, the government stayed out of the way and the economy recovered within two years. Certainly, it was painful, but the U.S. got through it quickly.

We will see the effects of government intervention during this downturn. At some point, we will pay for the excessive spending of the government as well as the overly easy monetary policies.  This doesn't even include propping up defunct organizations at the expense of successful ones. 

We need to stop looking at the government as some larger than life deity that can make everything alright. They create unintended consequences that ultimately delay any recovery.

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#6) On December 21, 2008 at 7:41 PM, outoffocus (23.24) wrote:

XTMFCaptain

Your response pretty much sums it up. Government needs to stay out of it.  And the most important part is when you mention people making the Government their god.   Idol worship of the government will be a downfall of America. 

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