Friday, August 12, 2011

Lessons from the Great Depression

The differences between the current economic mess and the Great Depression are many and often critical.  But having said this, the similarities are often so powerful as to be spooky.

More historical lessons for Europe
Erstellt am 4. August 2011 von kantoos

In a remarkable post, Ryan Avent compares Europe’s current problems to the history of the 1930s and the rise of the Nazi regime in Germany. And he does a good job at it, given the length of a blog post. He writes:

There is a striking irony to the current situation in the euro zone. It’s often assumed that hyperinflation gave the world the Nazis; that’s wrong. 
One of the easiest ways you can tell you are talking with an historical illiterate is if he says that Hitler's rise to power was due to the hyperinflation of the Weimar Republic.  That hyperinflation happened between 1921 and 1923 while Hitler took power in 1933 during the Great Depression.  Inflation--deflation?  Huge difference.
Well, mostly wrong. In his earlier days and attempted coup d’état (in 1923), Hitler was in part exploiting the frustrations of Germans (Bavarians, actually, as he was only active in Munich), with the hyperinflation – brilliantly captured by Lion Feuchtwanger’s novel “Erfolg” (“Success”). But the Nazi rise to power came later, when Germany was struggling: politically, as an increasingly violent and heavily divided society made any compromise very difficult. And economically, as Ryan compactly summarizes as follows:

… [During the economic crises after 1929], Germany found itself squeezed on two sides. The economy was crushed by an intense cycle of deleveraging and austerity, as the government struggled to maintain market confidence. And pressure was also applied on the monetary side, as Germany battled to fight gold outflows and keep itself on the gold standard.
… As European economies like Austria and Germany failed, America, Britain and France scrambled to assemble aid packages that might prevent a collapse, but these negotiations were inevitably characterised by petty disagreements and myopia, and the resulting aid packages were always too small and came too late. 
Eventually, the system failed entirely, countries began abandoning gold, reinflating, and spending heavily on an arms buildup. The back of the Depression was broken. But it was too late to save Europe from utter catastrophe. 
Then Ryan’s post culminates in what can be interpreted as a heavy criticism of European economists that did not foresee that they were about to wreck the very project that the Euro was to be the crown of:

The European Union, and its single-currency extension, were forged in the decades following the war in an effort to make sure that war never again divided and savaged the continent. But strangely enough, in the effort to tie itself together, Europe imposed some of the same fiscal and monetary constraints that precipitated the collapse of the 1930s. And here we are, watching history repeat itself.Within a Europe riven by imbalances, the fiscal and monetary screws are once again being applied to countries with no hope of escaping their financial burdens. Markets are attacking, and efforts to salvage the situation through massive aid packages are emerging too small and late to matter. The pressure within the squeezed economies is building, and that pressure will find a release, one way or another. A Europe hoping never to repeat its historical tragedies has gone and blundered into institutions that make those same tragedies more likely. The European project, as it looks now, has failed. … 
One has to feel sorry for Europe, in a way. It did its best to learn from history, hoping never to repeat it. But history is a long, complex course, and there’s always a chance that the lessons you miss are the most important ones. 
This contains more truth than the average (or even not-so-average) European is willing to concede. more
What we must remember is that the European economies are currently under savage attack from Predatory banking.  It has taken a while, but there seems to finally be a pushback from folks that were actually elected to regulate this sort of behavior.  Not a big one, mind you, but banning naked short selling seems like a good place to start.
Greece, Korea, Turkey And Now All Of Europe May Ban Short Selling 
Adam Taylor and Mamta Badkar | Aug. 11, 2011  
The European Securities and Markets Authority is considering a ban on short selling, reports The New York Times.

The authority is reportedly proposing a ban on betting against just financial stocks, or stocks in general.

It could focus on just naked short-selling, in which the party making the negative bet without borrowing the share it is shorting first.

The ban would only be in place till markets calm down.

Turkey became the third country trying to stem short-selling today, when it raised the minimum equity required to initiate a short-sale on the Istanbul Stock Exchange to 70%, from the previous 50%, according to Bloomberg.

Earlier this week, South Korea initiated a three month ban, and Greece, a two month ban on short selling, as regulators are trying to prevent speculation, after a massive drop in global stock markets. In 2008, several countries banned short-selling in an ultimately impotent attempt to control the crisis.  more

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