Thursday, July 16, 2009

A Revenge Crash, Ahead?

Fed chairman Ben Bernanke is an academic. Before joining the Federal Reserve, he was chairman of the economics department at Princeton University. He has written extensively on the Great Depression. He knows the financial history of central banking in America. He certainly knows the history of the battle over central banking that took place between President Andrew Jackson and Nicholas Biddle.

At the age of 37, Biddle was named president of the Second Bank of the United States. Trouble started for Biddle, and the bank, after Andrew Jackson was elected president. Jackson believed that "the world is governed too much," and was deeply suspicious of banks, especially of central banks.

On October 1, 1833, Jackson decreed that no more government money could be deposited into the bank. Thus weakening the banks political power. The bank was not rechartered.

Biddle was furious. In an act of revenge, he squeezed credit out of the banking system dramatically. It led to the Panic of 1837. Hundreds of banks closed. And resulted in a five year depression.

Now, let's move back to the current day. Bernanke is under pressure from many directions. There is a Congressional investigation of Bernanke's involvement in the Bank America/Merrill Lynch merger. There are widespread rumors that Larry Summers will be named to replace Bernanke when his term is up in January 2010. And Ron Paul is putting so much pressure on the Fed with his "audit the Fed" campaign that the Fed has hired a lobbyist to deal with Congress.

The future does not look bright for Bernanke in the catbird seat at the Federal Reserve. So what does this have to do with Biddle?

Suddenly, the Fed has stopped printing money, again. Ater climbing at a rate of 15% annually, it has slowed to a crawl of under 3% (3 month annualized M2 nsa).

Does Bernanke believe his days are numbered as head of the Fed? Is this money slowdown a parting gift from Bernanke to Obama and Summers? Is he setting up a Biddle type revenge crash of the economy?

He knows the history. He knows how to do it, and money growth is slowing in Biddle like fashion.

Stay tuned. I don't know why Bernanke is slowing money supply, like he did last summer, but a revenge crash can certainly be added to the pile of possibilities.


  1. "Biddle was furious. In an act of revenge, he squeezed credit out of the banking system dramatically. It led to the Panic of 1837. Hundreds of banks closed. And resulted in a five year depression."

    If that is what happened - Biddle conducted national monetary policy based purely on revenge thus inlficting unneccesary hardship on millions of his fellow Americans - I find it shocking. Same with Bernanke if he is doing the same.

    Isn't it possible Bernanke has been reading his critics and is finally waking up and smelling the coffee? Maybe he just realises his monetary expansions of the last few years were a tad over the top.

  2. I am an amateur here that dont know much abt economics. At first when Bernanke was printing money like crazy, u guys said he was going to cause inflation n thus hurting the economy. Ur advice is for him to stop printing money.Now that he has slowed now his printing press, u said he will crash the economy? I mean i dont understand the logic here, isnt it good that he is slowing down the printing of money? I can understand of course that commodity prices will come off when he slow down the printing of money. But thats beside the point. Whats so bad abt him slowing down the printing press?

  3. Wenzel - very shrewd observation. When I was in high school, I was assigned the role of Jackson in a mock impeachment trial. One of the charges which was "impairing the economy" or some such nonsense as a result of destroying the bank. In preparing for the trial, I researched a number of documents regarding the bank (read a lot of stuff by Jackson himself - I feel like this experience predisposed me towards being suspicious of central banking!). Interestingly, even my AP History textbook acknowledged that Biddle "orchestrated a panic" in retaliation to Jackson's actions in an effort to scare him into changing his mind. If you think about it, that's a pretty astounding admission for a mainstream textbook.

    I didn't really understand the economics of it back then, but now that I've been studying Austrian economics for a few years, it really enriches the whole experience and fills in a lot of the conceptual gaps.

    Anyways, I'm glad you brought this up. Great connection and this is definitely something to watch - you could very well be on to something.

  4. Oh yeah, I forgot to mention - I didn't end up getting impeached : )