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Trust, liquidity, and the Great Depression too!

There’s a good article in today’s New York Times comparing some of the circumstances surrounding the Great Depression with what’s going on today, Lesson From a Crisis: When Trust Vanishes, Worry.

The article talks about the lack of response to the early warning signs of the Great Depression and especially about the public’s view that Wall Street should be punished for its sins, much as we hear today, especially from conservative Republicans and liberal Democrats.  Due to that desire, no meaningful actions were taken in 1929 and 1930, when it might have been possible to avert disaster.

The article goes on to describe how the depression of 1929 became the Great Depression in the early 1930s due to the runs on banks that happened in the early ’30s.  Those runs caused banks to close, decreasing the knowledge of who to trust with loans, shrinking credit and reducing the money supply; effectively, the liquidity for purchasing anything went away.  As there was less and less money to go around, businesses folded, putting people out of work and reducing that supply of money further.

When you link this with the concentration of capital in a small number of hands, it gets worse.  The bulk of cash today is held in fewer hands per capita than at any time in American history, even that time leading up to the Great Depression (when it was the highest previously).  There are probably a few reasons for this shift of capital, including the cheap money available that caused the mortgage bubble, and the Bush administration’s tax cuts.

We need to find a way to shift money lower into the economy while also improving the availability of credit; without both actions, we’ll likely face a depression.

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