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Perilously close to Depression-era mistakes

August 6, 2010 - Mike Maneval

Marshall Auerback of the Franklin and Eleanor Roosevelt Institute worries that the U.S. may be on the verge of making the same mistakes made in the early years of the Great Depression - "perilously close," in his words.

Part of what has Auerback concerned are signs the Federal Reserve wants to pursue asset purchases and sales, under a practice known as "quantative easing," as a tool to pressure banks and financial institutions into more aggressive lending.

Auerback argues the fears are rooted on a flawed emphasis on the impact the levels of cash banks have on reserve has on lending. "What is required to drive lending is a creditworthy borrower on the other side of the bank lending officer’s desk, which means an employed borrower, whose income allows him to sustain regular repayments," Auerback writes. "Absent that, there will be no lending activity."

Auerback further observes the U.S. saw a contained economic boom between 1933 and 1937 - a four-year period with real gross domestic production, he notes, growing by about 12 percent. During this promising boom, bank credit to the private sector continued to fall for two years and stayed under the water mark. In Auerback's words, the sectors the Fed now seems most focused on in developing policy likely "had nothing to do with the takeoff of the economy." 


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