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Bill Fleckenstein: Today's Fed Stimulus Is a Replay of 1920s Economic Programs

By    |   Tuesday, 23 Jul 2013 08:02 AM

Money manager Bill Fleckenstein says the history books reveal the Federal Reserve has been the source of — not the savior from — the largest and most dire financial crises in the United States.

Fleckenstein, proprietor of Fleckenstein Capital and author of "Greenspan's Bubbles: The Age of Innocence at the Federal Reserve," wrote in a contributor column on MSN Money that it was the Fed's easy-money policies that led to the stock bubble and the crash of 1929.

"Yet the sums involved in previous periods of irresponsibility are more rounding errors nowadays" as a comparative percentage of gross domestic product between then and now, he wrote.

Editor's Note:
See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

He noted the Fed has expanded its balance sheet to $3.5 trillion, and it owns more than 20 percent of outstanding U.S. debt.

"Either it is going to continue buying bonds forever, which is impossible, or there is going to be a massive dislocation at some moment, because someone else is going to have to buy that debt when the Fed ultimately stops, even if it doesn't choose to sell anything (and just lets the debt run off)."

Current economic consensus, led by Fed Chairman Ben Bernanke, claims it was the Fed's tardy and weak response to the 1929 crash that prolonged the Great Depression and made it worse.

But Fleckenstein said history books show the Fed actually intervened much earlier in the 1920s, and was a primary source of the economic meltdown.

He said Benjamin Anderson's "Economics and the Public Welfare" revealed it was that the Fed relaxed the money market, stimulated bank expansion and purchased government securities in 1924 and 1927 that set the stage for disaster.

In the winter of 1927-28, the Fed became alarmed and reversed course, but by then stock market mania had taken hold and it was too late, Fleckenstein explained.

Similarly, "Modern Times: The World from the Twenties to the Eighties" by Paul Johnson, also showed the Fed set the table for a downturn in the years preceding the 1929 crash, Fleckenstein noted.

"Domestically and internationally, they [central banks] constantly pumped more credit into the system, and whenever the economy showed signs of flagging they increased the dose," wrote Fleckenstein in quoting a passage from Johnson's book.

Fleckenstein said another passage from Johnson's book read: "The 1929 crash exposed in addition the naivety and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the system they had been so confidently manipulating."

Fleckenstein concluded, "The main point to understand is that the 'ill-informed meddling' on the part of the Fed in the mid-1920s was infinitesimally small compared with what it has done in the past five years, and the ultimate damage will be correspondingly horrendous."

Meanwhile, Pimco's Bill Gross predicted, in the wake of Treasury bonds' biggest two-week gain in nearly a year, that the Fed will not tighten monetary policy until 2016 at the earliest.

"So bonds come out of their coffin & it's not even Halloween," Gross, who manages Pimco's $268 billion Total Return Fund, wrote on Twitter. "Bernanke says follow policy rate & we agree."

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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Money manager Bill Fleckenstein says the history books reveal the Federal Reserve has been the source of — not the savior from — the largest and most dire financial crises in the United States.
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2013-02-23
Tuesday, 23 Jul 2013 08:02 AM
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