Jan. 23 (Bloomberg) — Ben Bernanke is spooked. Thats one
explanation for the Federal Reserve chairmans decision to lead
the Open Market Committee in yesterdays unprecedented 75-basis-
point cut in the fed funds rate.
The Fed spoke of a “weakening of the economic outlook and
increasing downside risks to growth, a vague phrase that
reminds us that what Milton Friedman said in 1965 is still true:
“We are all Keynesians now, monetary and fiscal fiddlers who
think the government has a broad mandate to manage the economy.
But what Bernanke was also saying was that he fears a more
general contraction of money and credit. If not outright
deflation, then disinflation, a slowdown in price increases.
He and his allies note, in defense of their move, that
long-term interest rates arent high and, indeed, have generally
headed down this month. That suggests that investors dont fear
inflation. Still, if you look at some of the other standard
measures, you dont see deflation or disinflation, or anything
else that starts with “D. You see an “I — inflation.
With deflation, borrowing becomes hard even for worthy
customers. Today, even not-so-worthy customers lack mailboxes
big enough to hold the solicitations from lenders.
With deflation, the price of gold and other commodities
usually goes down. Before the Fed moved yesterday morning, gold
was at $865 an ounce, or triple the price for an ounce in 2002.
The metal is so much in demand as a cultural symbol that real
estate is pretending to be gold. At least thats the conclusion
one could draw from the Century 21s “gold standard campaign.
So much gold shows up in its ads that you would think they were
about commemorative coins, not ranches or split-levels.
Strong Dollar?
With deflation, the currency strengthens. These days the
dollar is retreating, to put it kindly. Shorting the dollar is
so hot that every fool and his brother is clicking on
“prudentbear.com, a fund that claims it can help investors
protect against a weakening greenback.
Bernanke knows the difference because he spent so many
years describing the great deflation that was the Great
Depression. Then, as Bernanke noted in a 2002 speech, prices
dropped an average of 10 percent a year — for four years in a
row.
For farmers, such declines came on top of commodity-price
drops that had persisted through the otherwise prosperous 1920s.
The building where Bernanke now sits is named after Marriner
Eccles, a Utahan who himself blocked an early 1930s run on a
family bank in Ogden by ordering the tellers to count the cash
for customers slowly, and to “smile, be pleasant, show no signs
of panic.
Play Money
Towns resorted to mimeographing their own monopoly money,
local scrip, to trade. But local courage alone couldnt overcome
a monetary shortage.
In his essays, some of the greatest in his field, Bernanke
painfully describes the housing market of 1933. It was so far
from Century 21 and condo flipping as to be another world. Half
of all farms were late on payments. One in five owners in major
cities was in default on payment of interest or principal, and
in places such as Cleveland, Indianapolis and Birmingham,
Alabama, half or more of families were in danger of losing their
homes.
Bernanke has pointed out that governments often mislabel
other problems as deflation. In the same 2002 speech where he
talked about the Depressions price decreases, he noted that
Japans troubles in the 1990s were in part due to the countrys
unwillingness to reform its banking and financial industries.
The focus, however, is a shame, for the 1930s comparison
isnt the only relevant one. Some of my blogging colleagues have
been debating whether 2008 is more like 1971 than 1929. The
argument for the 71 analogy is strong. In the summer of 1971,
unemployment was in the high 5s and low 6s, something like
today.
Prices were suggesting inflation, and the U.S. was
struggling with its monetary links to a big foreign power –
Europe.
Volcker to Rescue
President Richard M. Nixon lived up to the famous statement
about us all being Keynesians, not on the monetary side, where
he broke apart Keyness own gold-exchange system, but on the
fiscal side, where he ordered short-term measures that yielded
the stagflationary 70s.
Trouble ended only when Paul Volcker had the courage to
push up interest rates and squeeze inflation out of the economy.
Today, Senator Hillary Clinton, or George W. Bushs
administration for that matter, can talk about how “the middle
class is stalled, and express concern for those seeking homes.
But “stalled only describes a small group. Half a year into
the credit crisis, a good share of Americans are still
customizing their mortgages, like someone placing a latte order
at Starbucks.
You Want `Stalled?
“Stalled isnt something we have experienced.
“Stalled is what heads of households were in January 1982,
when they went into a bank and learned the fixed rate for a 30-
year mortgage was about 17.5 percent.
Anyone who talks about the end of the housing dream may
want to reacquaint himself with the story of Tall Paul. That
many adults have no financial memory of that period or the
Nixon-Lyndon Johnson years before that may be the best
explanation for the mysteriously low long-term rates of today.
So our national problem may be that we remember the 1970s
too little and the Depression too well. The country will live
with the consequences, good or less good. In any case, one thing
is true: We are all Bernankes now.
(Amity Shlaes, a senior fellow in economic history at the
Council on Foreign Relations, is a Bloomberg News columnist. The
opinions expressed are her own.)
To contact the writer of this column: Amity Shlaes at
Tags: adult, adults, amp, chard, family, farmers, household, money, rth, yesterday morning