Milton Friedman explains role of gold in Great Depression.

Milton Friedman - The Great Depression Myth

The 1933 Implication: Citi, SunTrust, Ally and MetLife Bank Fail Fed‘s “Doomsday” Bank Stress Test

“The Fed tested the banks to see if they had enough reserves to handle an economic shock in which unemployment would increase to 13 percent, the Dow Jones industrial average would lose half its value and housing prices would fall an additional 21 percent.” (1)  



The above stress test was dubbed by the media as the “doomsday” stress test. Doomsday in that the parameters are highly unlikely, yet probable and if the parameters were all exactly in place, the economy would be in some stage of depression and hence “doomsday”. (2) (3) (4) 


　

The failure of Citi, SunTrust, Ally and MetLife Bank can surely be viewed in many ways regarding such a highly unlikely yet probable scenario. However, the implication and consequential perception of naming-names regarding “failure” was discussed by Milton Friedman and Anna Schwartz in the book The Great Contraction 1929-1933. One might consider the following:


The Banking Panic of 1933

“This time the availability of RFC [Reconstruction Finance Corporation] loans did not stem the rising tide of bank failures, partly because a provision of an act passed in July 1932 was interpreted as requiring publication of the names of banks to which the RFC had made loans in the preceding month, and such publication began in August. The inclusion of a bank’s name on the list was correctly interpreted as a sign of weakness, and hence frequently lead to runs on the bank. In consequence, banks were fearful of borrowing from the RFC. The damage was further increased in January 1933 when, pursuant to a House resolution, the RFC made public all loans extended before August 1932.” (5)


And the immediate results of naming names?

“The banks that failed the test were in rough shape: Citi fell 2.3% after-hours, SunTrust 3.7% and MetLife 2.9%. Ally is not publicly traded and still substantially owned by the U.S. Treasury.”(6)



Notes:
(1) Citi, Ally, SunTrust fail Fed stress tests

http://www.newsobserver.com/2012/03/13/1929121/citi-ally-suntrust-fail-fed-stress.html#storylink=cpy


(2) Citi, Ally, Suntrust, MetLife fail stress tests, Yahoo News, 03/13/2012

http://en-maktoob.news.yahoo.com/citi-ally-suntrust-metlife-fail-stress-tests-205652463.html

(3) Citi among banks that fail Fed stress test, Market Watch, The Wall Street Journal, 03/13/2012

http://www.marketwatch.com/story/citi-among-banks-that-fail-fed-stress-test-2012-03-13?reflink=djm_HAMWRSSCommentedH

(4) Citi, Ally, SunTrust fail Fed stress tests

http://www.newsobserver.com/2012/03/13/1929121/citi-ally-suntrust-fail-fed-stress.html#storylink=cpy


(5) The Great Contraction 1929-1933, Milton Friedman and Anna Schwartz, Princeton University Press, 2008 edition, page 52.

(6) Citi, Ally, SunTrust And MetLife Flunk Fed's Stress Test, Forbes, 03/13/2013.

http://www.forbes.com/sites/steveschaefer/2012/03/13/citi-among-four-banks-to-fail-feds-stress-test/







　

Friedman and Schwartz vs. Today’s Talking Heads: The 88 vs. The Gazillion

Talking heads, pundits, and media types speak/talk/write volumes-upon-volumes about the recent housing boom-bust and subsequent financial crisis. Specifically they commentate that the subsequent deep economic recession, shallow recovery, and subsequent economic malaise has a common thread of risk aversion and the quest for liquidity. They elude to, poke about, show charts and graphs, and otherwise attempt to explain in 100 gazillion words that risk adverse and liquidity is the revealed preference after a cataclysmic economic event.


Consider the following excerpt, specifically the eighty eight words within the following passage that concisely and compactly economize on the 100 gazillion plus words of today's talking heads, pundits, and media types:

“Partly, no doubt, the stock market crash was a symptom of the underlying forces making for a severe contraction in economic activity. But partly also, its occurrence must have helped to deepen the contraction. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes of a new era had prevailed. It is commonly believed that it reduced the willingness of both consumers and business enterprises to spend ; (6) or, more precisely, that it decreased the amount they desired to spend on goods and services at any given levels of interest rates, prices, and income, which has, as its counterpart, that it increased the amount they wanted to add to their money balances. Such effects on desired flows were presumably accompanied by a corresponding effect on desired balance sheets, namely, a shift away from stocks and toward bonds, away from securities of all kinds and toward money holdings.” - Friedman and Schwartz, The Great Contraction 1929-1933, pp 10-11.



Note: the footnote referenced by Friedman and Schwartz appears below:

(6) See A. H. Hansen, Economic Stabilization in an Unbalanced World, Harcourt, Brace. 1932, pp. 111-112; J. A. Schumpeter. Business Cycles, McGraw-Hill 1939, Vol. II pp. 679-680; R. A. Gordon. Business Fluctuaions, Harper, 1952, pp. 377-379, 388; J. K. Gaibraith. The Great Crash, 1929, Boston. Houghton Mifflin, 1955, pp. 191-192. See also Federal Reserve Board, Annual Report for 1929, p. 12.