Thursday, September 30, 2010

If 1928 = 2007 Then Does 1929 = 2008?

Economist Robert Reich, fascinated by the parallels between the 1929 Stock Market Crash and the Crash of 2008, looked at the research, and saw two years that stood out as having the greatest concentration of wealth at the very top: 1928 and 2007.

He writes about that and much more in his new book, Aftershock: The Next Economy and America's Future.  In particular, he was impressed with Marriner Eccles, former Chairman of the Federal Reserve between 1934 and 1948, who after much analysis, saw that the growth and concentration of income at the top created the "underlying economic stresses that caused the Great Depression."  In particular, the creation and destruction of two bubbles.

  1. Middle Class Debt Bubble: The declining purchasing power of the middle class, who no longer had what they needed to keep the economy going because so much of the wealth and income in America went to the very top, so that the only way the middle class could continue spending was by going deeper and deeper into debt.
  2. Concentrated Wealth Speculative Bubble: The top 1%, had accumulated so much money they started speculating  in stock, commodities and real estate.  
FDR, with the assistance of Eccles fundamentally restructured the economy.  If one thing didn't work, FDR tried another.

In 1935, FDR legalized unions and added protections for collective bargaining.  He created Social Security, the minimum wage, the 40 hour work week, with time and a half...in other words, he found ways to spread whatever prosperity there was in order to get the economy moving again.

Between that - the reorganization of the economy under the New Deal - and WWII, which put Americans to work, the post war economy became "The Great Prosperity", as Reich calls it, which lasted for 30 years.  By the late 1970s, the concentration of wealth at the top went from 23.5% in 1928 to just 9%.  Is it any surprise that the power elite hate the New Deal...hate FDR...hate...

However, not to worry:

The insufferable suffering would soon expire,
as Reverse Robin Hood appeared with bailing wire.
President Reagan, the almighty, we bow to thee;
to the rescue, lift us up, oh great missionary!
The excess wealth transfer will soon commence,
and return us from this horror to a new pretense.
-- a top 1%percenter from 1980

"It became apparent to me, as a capitalist, that if I lent myself to this sort of action and resisted any change designed to benefit all the people, I could be consumed by the poisons of social lag I had helped create. [...] ...men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by people as a whole toward those rules. After I had lost faith in my business heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed."  -- Marriner S. Eccles
"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nations economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. The time came when there were no more poker chips to be loaned on credit. Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices.This then, was my reading of what brought on the depression." -- Marriner S. Eccles

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