Tuesday, November 18, 2008

Merrill's David Rosenberg discovers Rothbard

Merrill's David Rosenberg discovers Rothbard (HT Vijay). Maybe one day we will hear the expresson "We're all Rothbardians now."

With this in mind, we were fortunate to have a client mail us a book titled America's Great Depression by Murray N. Rothbard. We think it is an absolute must-read, on the scale of Amity Shlaes' The Forgotten Man. In this book, you will learn that the New Deal machinery was established by Herbert Hoover, not FDR, and that the scale of the government incursion into the economy was so farreaching that the multi-year program actually ended up doing more harm than good. What is amazing is the chapter on the Reconstruction Finance Corporation (RFC), which was like the TARP in its efforts to bolster government equity stakes in banks, and therefore, to perpetuate the excess capacity in the system. The RFC provided money to groups from financials to farmers (cotton loans were big) to railroads ("some $264 million were loaned to railroads during the five months of secrecy") to state governments. Sound familiar?

This RFC began with government capital of $500mn in 1932. Eventually, that grew nearly eight-fold, which is why we think the current TARP is really TARP1. You read this book and you get a glimpse of Hoover's "war on the stock market, particularly on short-sellers" and the new Federal bankruptcy law of 1932, which served to "weaken the property rights of creditors ... states also joined in the attack on creditors" ... as in most depressions, the property rights of creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity ... many states adopted compulsory debt moratoria in early 1933.

And get this, "the banks also received their share of Hoover's ire for their unwillingness to expand in those troubled times". Hoover actually lodged a complaint in the New York Times that "banks have not passed the benefits of these relief measures on to their customers". So, in the end, Hoover (Roosevelt, remember, inherited and expanded on this infrastructure) "and Congress agreed to transform the RFC from a generally defensive agency aiding banks and railroads in debt, to a bold 'positive' institution, making capital loans for new construction".

No comments: