Department of "Huh?" (Bear Stearns Edition)
Differences Between Obama and McCain...

Attempted DeLong Smackdown Watch: Origins of Central Banking Edition

Greg Ransom writes:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: Here's a suggestion for Blinder and DeLong. Read some Roger Garrison, and give two seconds to thinking about how the Fed manipulates the time structure of the production economy through it's constantly failed attempt at price controls in the market for money and credit. Until the do so, I can't see how they can have anything of validity to say to the rest of us on this subject. Posted by: PrestoPundit | June 15, 2008 at 09:11 PM.

Greg's argument that attempts to avoid depression through government financial manipulation either by cutting off speculators' resources beforehand or by making sure that they are punished and bankrupted afterwards sufficiently completely that nobody dares try that again--Greg's argument that attempts to avoid depression through government financial manipulation must necessarily fail was, to my knowledge, first made comprehensively by Karl Marx and Friedrich Engels:

Reviews from Neue Rheinische Zeitung Revue: The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation....

The years 1843-5 were years of industrial and commercial prosperity.... As is always the case, prosperity very rapidly encouraged speculation... [which] occurs... when overproduction is already in full swing... provides overproduction with temporary market outlets... precipitating the outbreak of the crisis and increasing its force.... When the Bank of England keeps its interest rates down in times of prosperity... capitalists with investments in loan capital thus see their income reduced by a third... under pressure to look for more profitable capital investments. Overproduction gives rise to numerous new projects, and the success of a few of them is sufficient to attract a whole mass of capital in the same direction, until gradually the bubble becomes general...

The view that overspeculation is not the disease but instead only a symptom of the truly serious disease of a maladjusted time structure of the production economy is not just (a) Marxist in its origins but also (b) a very powerful argument for Marxist politics because the disease existed before there were modern central banks to "manipulate the time structure of the production economy through... [interventions] in the market for money and credit" in an attempt to cure it. Indeed, central banking grew out of the belief that what appeared to be the disease--overspeculation--was in fact the disease and could be if not cured at least mitigated by central banking lies at the origins of our modern central banking institutions.