U.S. looking eerily similar to Rome in the 2nd Century - Bloomberg

[Soul Crusher]

FDR's policies prolonged Depression by 7 years, UCLA economists calculate
By Meg Sullivan August 10, 2004 Category: Research

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.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

-UCLA-                                                       

LSMS368                                             

[kcballer]

Something from David's recent diary "Fox News: 'Historians Pretty Much Agree' That FDR Prolonged the Great Depression"  really stuck in my craw, above and beyond the fact that the whole line of rightwing BS sticks in my craw.  And that was the paper from UCLA that David referenced:

    Now, it's true - back in 2004, two UCLA professors published a little-noticed report claiming the New Deal's government intervention prolonged the Great Depression. But that assertion has been subsequently eviscerated by, ya know, actual data.

What this immediately reminded me of was a UCLA "study" from 2005, (I wrote about at MyDD here), purporting to show that there really was leftwing bias in the media, a study that included, along the way, the identification of both the ACLU and the NRA as centrist think tanks.  Since neither of them are either centrist or think tanks, there was an obvious problem with the study, and it seemed the height of irresponsibility for an academic institution of UCLA's stature to allow itself to be used to promote such obviously shoddy "research" with such an obvious propaganda value.  Indeed, as I dug into it further--and others did as well--the total lack of effective peer review became quite obvious.  It was "peer-reviewed", it turned out, in a journal devoted to a disciplinary approach that had no competence whatever in the field of media studies.

This smelled a whole lot the same to me, particularly when I actually clicked the link and took a look. Ho boy!  I had no idea!
Paul Rosenberg :: A Brief Peek At UCLA's Anti-FDR Propaganda
The authors claimed the Depression should have ended in 1936, but that would have meant FDR being responsible for completely reversing, and obliterating the negative effects of almost 3 ½ years in only a slightly longer period of time.  This struck me as such an incredibly high growth rate requirement any competent economist would have to object to it as completely unrealistic.  More precisely, here is the UCLA announcement about what they wrote:

    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.

    ....

    In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933....

    Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

I've cut out a good deal of detail, about which a good deal else might be said, simply to focus on the big picture here: Cole and Ohanian claim the Depression was over by 1943, but it could have been over by 1936, if only FDR hadn't mucked things up.  In fact, they say:

    The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

This is, quite simply, ludicrous.  And it's easy to show why. So easy that any competent undergraduate in economics ought to laugh this out of court.

Put simply, if we take 1943 to set the level of having recovered from the Depression, and wind that back to a 1936 level that would have been out of the Depression, then the growth rate required to get there from 1933 would have been entirely unrealistic-much stronger, in fact, than the growth rates observed in the late 1920s, which the authors claim to be projecting from.  The growth rate from this "lost opportunity" scenario, as I like to call it, is simply inconsistent with anything we know about US economic history.

Now, of course, I didn't check their detailed work.  I didn't do a sector-by-sector analysis.  I didn't look at detailed productivity figures.  I just looked at GDP levels.  The GDP gains that their "lost opportunity" scenario required would have averaged 16.9% for four consecutive years, from 1933 to 1936-a totally unprecedented growth rate, for a cumulative 86.7% increase in four years.  Indeed, the only years in US history with such growth rates were 1941-43, with growth rates of 17.1%, 18.5% and 16.4%.  Even so, the best 4-year run, 1940-1943 fell more than 10% short of their projection-75.8%.

So, in essence, Cole and Ohanian are claiming that if only FDR hadn't mucked things up, the US would have experienced the spectacular growth rates of 1940-1943 seven years earlier, plus another 10.9%.

At this point, the question one wants to ask Cole and Ohanian is "What are you smoking, and where can I get some?"  And the question one wants to ask UCLA is, "When did Forest Gump take over running this place?"

Backup Chart and Explanation

The chart below is useful as a framework for further clarifying that above. An explanation follows it.

Year   GDP Change   GDP Index
(1929=100)   4.816%
Growth   9.06%
Growth   16.9%
Growth   7.7%
Growth
1929    --   100.00   100.00    --    --    --
1930    -8.6   91.40   104.82    --    --    --
1931    -6.4   85.55   109.86    --    --    --
1932    -13   74.43   115.15   74.43   74.43   74.43
1933    -1.3   73.46   120.70   81.17   87.01   80.16
1934   10.8   81.40   126.51   88.53   101.71   86.33
1935   8.9   88.64   132.61   96.55   118.90   92.98
1936   13.0   100.16   138.99   105.29   139.00   100.14
1937   5.1   105.27   145.69   114.83    --    --
1938    -3.4   101.69   152.70   125.24    --    --
1939   8.1   109.93   160.06   136.58    --    --
1940   8.8   119.60   167.77   148.96    --    --
1941   17.1   140.05   175.85   162.45    --    --
1942   18.5   165.96   184.31   177.17    --    --
1943   16.4   193.18   193.19   193.22    --    --

Instead of actual GDP levels, I use an index set to 100 for 129, to make the comparisons as transparent as possible, with the changes in GDP in the first column following the years.  I also have four columns showing what GDP levels would have been with constant GDP growth covering various periods of time, which allow us to make various observations or comparisons.

The 4.816% growth column shows what a constant growth would be from 1929 to 1943.  Since the authors cite 1943 as the year we emerged from the Depression, this presumably represents the level of economic activity in each year that would have been sufficient to get us out of the Depression in that year.  The level for 1936 then becomes the figure that their "lost opportunity" scenario would have to hit.

The next column, 9.06% growth, represents that average growth rate needed from when FDR took office in 1933 to reach the actual GDP in 1943.

The 16.9% growth represents the growth rate required to get out of the Depression in just 4 years (minus three months), which the authors claim would have happened if FDR hadn't mucked things up.

The last column, 7.7% growth, is the constant growth rate matching FDR's actual record from 1933 to 1936, before he cut back on his proto-Keynsian stimulus approach. 

Finally, it's worth noting that the actual 4-year growth from 1932 to 1936 (which was not constant) amounted to 34.6%, an extremely high growth level.  There were only six earlier periods of higher growth in US history, actually composed of just three different 5-year periods.  However, 1933-36 was itself part of a similar 5-year period, and the other 4-year period from that stretch, 1934-1937, was the fastest-growing period of GDP of them all, until the growth spurt that followed after the recession of 1937/38. 

Of course one does expect rapid growth in recovering from a severe recession or Depression, so this is not to claim any spectacular achievement on FDR's part.  On the other hand, this was not the only time we had experienced a financial downturn in our history.  Yet, no other recovery period was as strong as 1934-1937. That surely counts for something, and helps explain why FDR was overwhelmingly re-elected in 1936.

http://www.openleft.com/showDiary.do?diaryId=10644


One thing is clear: the GOP is not about to fold up shop and go along with Barack Obama, just because he's President and the Democrats won a substantial legislative victory as well last November.  They're already starting to marshall their forces to oppose,  or at least slow down, and render as ineffective as possible, whatever stimulus package Obama comes up with.  And, of course, recycling lies about the New Deal, FDR and the Great Depression are essential parts of the package.  On Sunday I wrote a diary, "A Brief Peek At UCLA's Anti-FDR Propaganda", which looked only at the gross parameters surrounding claims made in a paper that David had referred to in passing in a previous diary.

While kanzeon weighed in late to make the point: "The measure of when the Depression ended, to conservative critics, isn't usually GDP or real output, but unemployment," negative GDP growth is the standard by which economists routiney identify recesssions--and by extension depressions--as well as being the single most comprehensive measure of economic activity (for good or ill), so I still think it's useful to look a little more closely at GDP as a pre-emptive antidote against conservative/GOP bullshit that's bound to be coming at us in the days ahead.

The UCLA report claimed that the Depression should have ended in 1936--7 years after it began, and roughly 3 3/4 years after FDR took office.  Without ignoring Kanzeon's caveat, that still seems rather hard to accept given just how badly the GDP was doing.  Thing is, I don't think I've ever seen a clear graphical representation of just how bad that was.  So I decided to make one myself.  Given the UCLA author's belief in a magic 7-year time-frame, I decided to chart the 7-year GDP growth figures from around the beginning of the US economy to date.  You can clearly see just how drastically the Great Depression departs from anything else in our history, as well as just how powerful our recovery was, particularly once WWII spending kicked in:

This chart just goes to show how incredibly unusual the Great Depression was.  No wonder a large number of people, all across the political spectrum, thought that it well might be the end of capitalism.  There was nothing remotely like it in all our history.  And the idea that everything could readily be solved by simply letting normal economic forces work--as the UCLA researchers propose--seems utterly unbelievable, simply by looking at the relatively limited scope of any of the other previous sharp rises, none of which is remotely large enough to get us back into the 20-40% 7-year GDP growth range that is normal for the economy in the specified 7-year time frame--much less the 3 3/4 years that FDR actually had in office before the end of 1936 rolled around.
Paul Rosenberg :: More Perspective On Great Depression / FDR
Another way of looking at that same data is look at the distribution of 7-year GDP growth-rates.  Here we see that the vast majority fall between 10% and 55%.  That's a pretty broad range by any measure--a factor of 5+.  Outside it we only have 9 growth rates that are higher, and 10 that are lower:

As it turns out, the four negative 7-year growth rates are all associated with the depths of the Great Depression, 1932-1935, before FDR's recovery had gained enough steam to cancel out the disastrous performance during Hoover's term after the Great Crash.  The next 3-slowest growth rates, all 1% or less--covered the two years either side of the 4 years with a negative total, plus 1914.

On the other hand, the top 9 years, with 7-year growth over 55%, include 1883 with 59.4%, 1882 with 61.7%, and 7 straight years of the WWII/Great Depression recovery period, 1940 to 1946.  Those two bookending years clocked in with a paltery 62.7% for 1940, and 67.2% for 1946. Beyond that it was 72.0% for 1941, 87.2% for 1942, 92.8% for 1943, 98.3% for 1944, and 103.1% for 1945.

With spectacular growth rates like that, it's hardly surprising that things would have to taper off, eventually, and thus it's not really so surprising that 2 of the last 3 years on the extreme low end of 7-year GDP growth are 1950 and 1951, with 6.4% and 6.0% growth respectively.  The only other year not directly or indirectly connected to the Great Depressio and its recovery period is 1897, with a 9.1% 7-year GDP growth, the lowest ebb recorded that was associated with the Panic of 1893, and its aftershocks.

http://www.openleft.com/diary/10664/

BTW more economists agree that your theory is full of sh*t than not.   

[kcballer]

Eating humble pie now 333?  How does it taste?  I wouldn't know i'm always right 

[Soul Crusher]

Eating humble pie now 333?  How does it taste?  I wouldn't know i'm always right 

Absolutely not.  The depression did not end until WW2 commenced.  FDR did nothing to end it. 

[kcballer]

Absolutely not.  The depression did not end until WW2 commenced.  FDR did nothing to end it. 

haha boom! Thread over

The GDP gains that their "lost opportunity" scenario required would have averaged 16.9% for four consecutive years, from 1933 to 1936-a totally unprecedented growth rate, for a cumulative 86.7% increase in four years.  Indeed, the only years in US history with such growth rates were 1941-43, with growth rates of 17.1%, 18.5% and 16.4%.  Even so, the best 4-year run, 1940-1943 fell more than 10% short of their projection-75.8%.

So, in essence, Cole and Ohanian are claiming that if only FDR hadn't mucked things up, the US would have experienced the spectacular growth rates of 1940-1943 seven years earlier, plus another 10.9%.

[Soul Crusher]

Watch these- Friedman is far smarter than you or I.

[kcballer]

I fail to see where he debunks the new deal at all.  He lambastes too much government involvement but he says nothing about the new deal being ineffective and actually praises the governments role in WW2. 

here is some more information about the new deal and it's importance http://www.openleft.com/showDiary.do?diaryId=10609

Heck the FDIC created by FDR helped stop too many banks from closing.  Here is a quote from Friedman

For a start, New Deal intervention saved the banks. During Hoover's presidency, around 20 percent of American banks failed, and, without deposit insurance, one collapse prompted another as savers pulled their money out of the shaky system. When Roosevelt came into office, he ordered the banks closed and audited. A week later, authorities began reopening banks, and deposits returned to vaults.

Congress also established the Federal Deposit Insurance Corporation, which, as economists Milton Friedman and Anna Jacobson Schwartz wrote, was "the structural change most conducive to monetary stability since ... the Civil War." After the creation of the FDIC, bank failures almost entirely disappeared. New Dealers also recapitalized banks by buying about a billion dollars of preferred stock...

[Soul Crusher]

I fail to see where he debunks the new deal at all.  He lambastes too much government involvement but he says nothing about the new deal being ineffective and actually praises the governments role in WW2. 

here is some more information about the new deal and it's importance http://www.openleft.com/showDiary.do?diaryId=10609

Heck the FDIC created by FDR helped stop too many banks from closing.  Here is a quote from Friedman

For a start, New Deal intervention saved the banks. During Hoover's presidency, around 20 percent of American banks failed, and, without deposit insurance, one collapse prompted another as savers pulled their money out of the shaky system. When Roosevelt came into office, he ordered the banks closed and audited. A week later, authorities began reopening banks, and deposits returned to vaults.

Congress also established the Federal Deposit Insurance Corporation, which, as economists Milton Friedman and Anna Jacobson Schwartz wrote, was "the structural change most conducive to monetary stability since ... the Civil War." After the creation of the FDIC, bank failures almost entirely disappeared. New Dealers also recapitalized banks by buying about a billion dollars of preferred stock...

Fine, that is a good point, my statements were more towards your claims that only m,ore govt spending can end a recession or depression. 

[kcballer]

Fine, that is a good point, my statements were more towards your claims that only m,ore govt spending can end a recession or depression. 

I don't believe in endless spending 333.  Friedman has some great points and i believe in a time of prosperity when the economy is strong implementation of his policies are a way to continue growing.  Keynesian policy has it's ceiling as we saw in the 70's.  But i stand by that the new deal was a necessary component and lessened the effects of the great depression.  I think in 50 years from now people will have a similar view (although not as positive as the new deal) of TARP and the Stimulus Bill. 

[Tito24]

Oh really?  

www.usdebtclock.org

Those numbers are so astronomical...there's no way we could ever climb out of debt....We should just declare bankruptcy, and start all over. Start a legitimate monetary system by the people for the people. Sure it will be ugly in the beginning...However, life will go on.

[Soul Crusher]

Those numbers are so astronomical...there's no way we could ever climb out of debt....We should just declare bankruptcy, and start all over. Start a legitimate monetary system by the people for the people. Sure it will be ugly in the beginning...However, life will go on.

sounds good to me.

[Bindare_Dundat]

That is why we have new keynesian economics.  Better suited to our time.  I have no doubt that if we can get this green bill passed, these incentives to produce green tech will become impossible to ignore.  That will allow us to become a manufacturing nation again.  One that invests not only in the future but in the present work force.  Will it hurt a little at first?  No doubt.  Anything new takes time to adjust to that's just the way it is, but in Obama's second term and beyond i hope we will see a the rise of America the maker again, lets just hope these companies don't ship any jobs overseas and Americans start realizing that yes buying something made in China is cheaper, but it takes a position away from an American.  Just like buying from wal-mart not only lowers the standard of living of the suppliers (because without offering walmart the cheapest prices they will be cut away and lose a major partner) but it kills off any local competition.   

wow, just wow. Flawed on so many levels I don't even know where to start

[Soul Crusher]

wow, just wow. Flawed on so many levels I don't even know where to start

You know what they say Bindare - "Those who dont know history are doomed to repeat it.' 

[Bindare_Dundat]

I fail to see where he debunks the new deal at all.  He lambastes too much government involvement but he says nothing about the new deal being ineffective and actually praises the governments role in WW2.  

here is some more information about the new deal and it's importance http://www.openleft.com/showDiary.do?diaryId=10609

Heck the FDIC created by FDR helped stop too many banks from closing.  Here is a quote from Friedman

For a start, New Deal intervention saved the banks. During Hoover's presidency, around 20 percent of American banks failed, and, without deposit insurance, one collapse prompted another as savers pulled their money out of the shaky system. When Roosevelt came into office, he ordered the banks closed and audited. A week later, authorities began reopening banks, and deposits returned to vaults.

Congress also established the Federal Deposit Insurance Corporation, which, as economists Milton Friedman and Anna Jacobson Schwartz wrote, was "the structural change most conducive to monetary stability since ... the Civil War." After the creation of the FDIC, bank failures almost entirely disappeared. New Dealers also recapitalized banks by buying about a billion dollars of preferred stock...

And where is the FDIC NOW?  BROKE! Again, the weight falls back on the people to keep saving everyone but themselves.

Sept. 24 (Bloomberg) -- The FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.

[Soul Crusher]

[Bindare_Dundat]

Those numbers are so astronomical...there's no way we could ever climb out of debt....We should just declare bankruptcy, and start all over. Start a legitimate monetary system by the people for the people. Sure it will be ugly in the beginning...However, life will go on.

I can't believe I agree with you on something.

[Bindare_Dundat]

Could the growth of MMA be one of the similar signs of this parallel demise?

[Soul Crusher]

Part 2.  - This is a pretty good video. 

[Soul Crusher]

Could the growth of MMA be one of the similar signs of this parallel demise?

I dont think so.  To me, peoples' preoccupation with sports like football, soccer, etc are.  I like the yankees and baseball and mma, but I am not one of these people who can name all sorts of stats and players etc yet not know the name on my two senators. 

A lot of my buddies are sports obsessed and have ZERO care, concern, or understanding of current events, history, economics, etc. 

[Soul Crusher]

Good video.  Wake up people. 

[Soul Crusher]

Will the Federal Reserve Cause a Civil War?
Posted by Stephen Gandel
Tuesday, October 19, 2010 at 5:35 pm
________________________ ________________________ _____


Bernanke critics are on the attack (Joe Raedle/Getty Images)

What is the most likely cause today of civil unrest? Immigration. Gay Marriage. Abortion. The Results of Election Day. The Mosque at Ground Zero. Nope.

Try the Federal Reserve. November 3rd is when the Federal Reserve's next policy committee meeting ends, and if you thought this was just another boring money meeting you would be wrong. It could be the most important meeting in Fed history, maybe. The US central bank is expected to announce its next move to boost the faltering economic recovery. To say there has been considerable debate and anxiety among Fed watchers about what the central bank should do would be an understatement. Chairman Ben Bernanke has indicated in recent speeches that the central bank plans to try to drive down already low-interest rates by buying up long-term bonds. A number of people both inside the Fed and out believe this is the wrong move. But one website seems to believe that Ben's plan might actually lead to armed conflict. Last week, the blog, Zerohedge wrote, paraphrasing a top economic forecaster David Rosenberg, that it believed the Fed's plan is not only moronic, but "positions US society one step closer to civil war if not worse."

I'm not sure what "if not worse," is supposed to mean. But, with the Tea Party gaining followers, the idea of civil war over economic issues doesn't seem that far-fetched these days. And Ron Paul definitely thinks the Fed should be ended. In TIME's recently cover story on the militia movement many said these groups are powder kegs looking for a catalyst. So why not a Fed policy committee meeting. Still, I'm not convinced we are headed for Fedamageddon. That being said, the Fed's early November meeting is an important one. Here's why:

Usually, there is generally a consensus about what the Federal Reserve should do. When the economy is weak, the Fed cuts short-term interest rates to spur borrowing and economic activity. When the economy is strong and inflation is rising, it does the opposite. But nearly two years after the Fed cut short-term interest rates to basically zero, more and more economists are questioning whether the US central bank is making the right moves. The economy is still very weak and unemployment seems stubbornly stuck near 10%.

The problem is the Fed only directly sets short-term interest rates. And they are already about as close to zero as you can go. That's why Ben Bernanke has been recently talking about something called "quantitative easing." That's when the Fed basically creates money to buy the long-term bonds that it doesn't directly control, and drive down those interest rates as well. That should further reduce the cost of borrowing for large companies and homeowners. Some people are calling this "QE2" because the Fed made a similar move during the height of the financial crisis when it bought mortgage bonds.

Not everyone agrees this is a good move. In fact, a number of presidents of regional Fed banks, not all of which get to vote at Fed policy meetings, have recently come out against Bernanke's plans. Some say it sets bad policy. Others think it will stock inflation, which might be the point. Few, though, have warned of armed conflict. Here's how Zerohedge justifies its prediction of why the Fed's Nov. 3rd meeting will lead to violence:

In a very real sense, Bernanke is throwing Granny and Grandpa down the stairs - on purpose. He is literally threatening those at the lower end of the economic strata, along with all who are retired, with starvation and death, and in a just nation where the rule of law controlled instead of being abused by the kleptocrats he would be facing charges of Seditious Conspiracy, as his policies will inevitably lead to the destruction of our republic.

OK. The idea that Bernanke might kill large swaths of low-income neighborhoods or Florida by his plan to further lower interest rates is a little ridiculous. But there is a point in Zerohedge's crazy. Lower rates do tend to favor borrowers over savers. And the largest borrowers in the country are banks, speculators and large corporations. The largest spenders in our country though tend to be individuals. Consumer spending makes up 70% of the economy. And the vast majority of consumers are on the low-end of the income scale. So I think it is a valid question to ask whether the Fed's desire to drive down interest rates at all costs policy is working. Companies are already borrowing at low rates. They are just not spending.

That being said, civil war, probably not. "It is a gross exaggeration," says Allan Meltzer, who is a top Fed historian at Carnegie Mellon. "I cannot recall ever learning about riots or civil war even when the Fed made other mistakes." When I called, David Rosenberg was traveling and couldn't talk, but he did send me a quick e-mail to stress that he has never, ever suggested that any moves the Fed makes will lead to a militia uprising.

Some smart people, though, including Meltzer, it appears, and Rosenberg do think the path of quantitative easing that the Fed looks likely to embark on is the wrong move. John Taylor, a top Fed scholar at Stanford, says eventually you will have to pull the support out, and when you do a year from now when the economy is recovering he thinks it could be quite disruptive. So even if you don't double dip now, you might double dip then. And even if you don't it would make for a slow recovery. Others, such as Raghuram Rajan, who has became famous for warning about the possibility of a financial crisis back in 2005, believe low-interest rates could be creating new bubbles in say gold or commodities.

So it seems clear what the Fed is likely to do. How the economy, the militias and the rest of us react is up in the air. The count down is on. T minus 15 days to Fedamageddon. See you there, hopefully.



Read more: http://curiouscapitalist.blogs.time.com/2010/10/19/will-the-federal-reserves-next-meeting-lead-to-civil-war/#ixzz12uMJG6xO

[Kazan]

Bullsh*t he did.  I guarantee you will find more economists that disagree with what you just said than agree with it.  Retrospect is a wonderful thing i guess you could say i could look back at ww2 and end it quicker now because i know what worked and what didn't.  Fact is it worked, FDR got us out of it.  Your blindness to the truth and to democrats in particular is rather sad 333.  If only FDR was around to enact his 2nd bill of rights we would never have needed a health care debate.  

Wow, you are ill informed. It did not work and maybe it took 70 years but all the crap that he enacted is finally bankrupting the nation. Second bill of rights my ass, what stupid fucking idea only a hardcore lefty would approve of. And yes WWII is what pulled the US out of the depression, it ignited the industrial might of the US.  

The United States began to suffer when the "political elite" decide to stray away from the founding principles, and here we are.