Posted by PrestoPundit on 10/01/2008

on what should be done:

One can oppose the bailout, by the way, and still favor the Fed
using open-market operations to prevent a decline in the money stock
and thereby to support the volume of bank credit. It was the steep
decline in M2 [in a banking system made artificially fragile by
government intervention] in 1929-33 that, as Friedman and Schwartz
explained, helped turn the recession of 1929 into the opening phase of
the Great Depression. It was not the decline in the number of banks.
Socializing and losses and perpetuating bad investments by propping up
insolvent institutions – the foolish mission of the Hoover-FDR
Reconstruction Finance Corporation – did not help recovery. Almost
certainly it hindered it.

By the way, too much credit in the 1920s was a chief cause of
the initial downturn: it sowed the seeds for it by distorting interest
rates and thereby fostering the malinvestments that came to grief.


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