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Apr 20, 2009

Today's Crisis is a Photograh of 29: By Fernando Guzmán Cavero

Today’s Crisis is a Photograph of the crash of 29: By Fernando Guzmán Cavero

Why of the current economic and financial crisis? The crash in the global economy is now mired, without having a clear picture of the magnitude of the consequences, whose roots are exactly the same as the crisis of 29: the lack of state real control to avoid designed schemes to inflate the prices of securities listed in the New York Stock Exchange,plus a lack of supervision of commercial banks credit among others. Since that experience, the USA started to search an answer to explain the crisis and began to re-think about the limits the free enterprise economic system should have. Something must be done to prevent abuses the imperfect markets have, was one voice; and mostly heard from those responsible of the development of the crisis. The following step was to begin establishing a series of controlling norms with the purpose prevent that few astute and powerful persons do not profit of thousands of thousands of people who believed in their proposals to invest in overvalued assets. The Securities and Exchange act of 1933, is the beginning of a continuous institutions established to prevent financial fraud.

The Great Depression according to Jim Powell does not have to do with immoral investments bankers and other financial advisors who traded stocks with insider information and structured schemes well known in our days, to increase artificially the stock prices. The article of Mr. Powell is a response to Adam Cohen:: ”Nothing to fear: FDR’s inner circle and the hundred days that created Modern America, Adam Cohen, Penguin,352.His argument, as Opposed to Cohen point of view, who praised Roosevelt’s New Deal, is basically the following:: “The main reason people lost money in the stock market was not in fact fraud. Rather, stock prices went down principally in response to Federal Reserve efforts to curb speculation. Unit Banking laws contributed to bank failures, by preventing them from opening branch offices to diversify deposits bases and loan portfolios”…… In the same manner he argues with Cohen, saying: Cohen also praises the Agricultural Adjustment Act for destroying, raising farm prices and farm income. Yet he ignores the effect it had on three-quarters of Americans who were not farmers they were consumers ,millions of them poor who had to lay out more money for food and clothing.(Cotton was among the crops destroyed.) Nor does Cohen acknowledge that from the beginning farm subsidies always went disproportionately to big farms, since the subsidies were paid on a per acre basis. He does not seem to consider FDR’s National Recovery Administration adversely affected farmers by establishing cartels that fixed prices above market level, requiring farmers for the supplies there needed.” Let me make some important precisions with regard to the statement, which attributes: Unit Banking laws, to failures in the banking system.

This statement is partially true, because not all the states banned branches. However, those which allowed branches, had less failures than those which prohibited them, see Wheelock 1995, Mitchener 2000, 2004. This is consistent with the diversification hypothesis, but not necessarily undoubtedly.

According to Mark Carlson and Kris James Mitchener; Calomiris and Mason (2000) and Carlson 2004 found out, precisely the opposite conclusion: bank with branches were more likely to fail than those called unit banks. The reason lays on the strategy pursued: ones emphasized in diversification, while the others privileged the reduction of reserves (see: Branch Banking, Bank Competition and Financial Stability; Mark Carlson and Kris James Mitchener).It is also very interesting, Jim Powell’s opinion regarding the creation of the Tennessee Valley Authority.
Powell, wanders the validity of such a state depending Agency, Organization or institution, that acted, if I well interpret him, as convened to its principal authorities power status. The numbers are the least important arguments; accountants can explain you, how hide or inflate personal or Corporations income. The arguments that state employees are paid at the expense of taxpayers is the neo classical, argument, which fails to be reasoned by the heavy it is and falls by its own weight. Never to say, that something had to be to be done and will have to be done now; where competition is not perfect and abuses arising from private monopolies are worst in last instance than those arising from arbitrary state policies. Are not both, the same photograph in different scenarios of the same lack of solidarity with the poorest people in this inhuman world? That is not the point Mr. Powell, the problem goes beyond which system of production of goods and services is better. I do believe that the human beings are walking around a circle since Marx and Adam Smith or Adam Smith and Marx, immersed in byzantine discussions. I wonder whether the debate should not start on the reflection of the anti-values that had conquered us since the biblical story of Cain and Abel. Are we going to open our eyes and recognize that the first matter is ethical, as to whether the natural resources of our planet could supply the needs that its human race demands (of all and not only of a few privileged), leaving around two thirds of human beings on the margin of its own existence. .If we do not start a new debate, with a different benchmark than the proposed, I will have to say:



To read full commentary click HERE