Roubini's Off the Wall History of Financial Crashes

Nouriel Roubini is continuing his mad streak of tweets attacking those who see dangers in central banking, in general, and the Federal Reserve in particular. His tweets distort the history of banking and crashes from the 1700's to modern day. He begins:

Happy/stable bucolic world before the Fed: Panic/Crisis of 1772, '92, '96-97, 1819, '25, '37, '47, '57, '68, '73, '84, '90, 1901,'07, '10-11

Financial crises be4 the Fed was created: Panic/Crisis of 1772, '92, '96-97, 1819, '25, '37, '47, '57, '68, '73, '84, '90, 1901,'07, '10-11

I'm not going to conduct a financial history of the last three centuries in this post, but lets take a look at the first two dates Roubini lists 1772 and 1792.

In the first case,1772, there was a  bank that attempted to inflate in Scotland, but it was a private bank and it didn't get very far. As Murray Rothbard suggested when private banks inflate damage is extremely limited. Ron Paul explained what happened in the period surrounding the 1772 bank collapse in Scotland:

In 1769  the Ayr Bank in Scotland was founded on the inflationist schemes which the Scotsman John Law had tried unsuccessfully to get the Bank of Scotland to adopt in 1705.

In a mere three years, the Ayr Bank managed to create a tremendous amount of unbacked paper, and when it finally collapsed in 1772 losses amounted to two-thirds of a million pounds, a staggering amount for those days.

But the intriguing thing is that the Ayr Bank's collapse had limited repercussions. It took with it only eight small private banks in Edinburgh. This is largely because of a well-developed clearinghouse mechanism that the large Scottish banks employed. They accepted each others' notes and returned those notes to the issuing bank. Suspicious of the Ayr Bank's issue, other banks made a practice of quickly returning Ayr's notes to it. When the collapse came, they were not affected. Nevertheless, to insure public confidence (and get their own notes into wider circulation) the two largest banks, the Royal Bank and the Bank of Scotland, announced that they would accept the bankrupt bank's notes. This was not as mad as it may appear. The collapse had few rippling effects because of Scotland's extraordinary practice of unlimited liability on the part of the bank's shareholders. So Ayr's loss was borne completely by the 241 shareholders, who paid all creditors in full.

A helluva a lot different than the recent crisis where taxpayers instead of Goldman Sachs shareholders JPMorgan shareholders paid the losses. But this 1772 crisis is the model, resolved by private parties and limited in damage, that Roubini is suggesting is more damaging than the model used to deal with current crises that get every one to pay for the recklessness of a few.

The 1792 crisis was a direct result of the First Bank of the United States. The bank was founded by Congress in 1791 at the insistence of Alexander Hamilton. In other words it was a central bank.  As Ron Paul reports:

The bank immediately fulfilled its inflationary potential by issuing millions of dollars in paper money and demand deposits pyramiding on top of $2 million in specie.

Dacid Cowen backs-up Ron Paul's account and explains how the halt in the central bank money printing resulted in the crash, the way all such manipulations always do:

The Bank had an enormous impact on the economy within two months of opening its doors for business by flooding the market with its discounts (loans) and banknotes and then sharply reversing course and calling in many of the loans. Although the added liquidity initially helped push a rising securities market higher, the subsequent drain caused the very first U.S. securities market crash by forcing speculators to sell their stocks. The largest speculator caught in the financial crisis was William Duer. When he went insolvent in March 1792, the markets were temporarily paralyzed. This so-called "Panic of 1792" was short lived as again Secretary Hamilton (as in the previous year during the script bubble) injected funds by buying securities directly and on behalf of the sinking fund. Yet incidents like the Panic of 1792 and the script bubble would be remembered for many years by opponents of the Bank who were still in steadfast opposition to the Hamilton inspired institution.

Thus, we see that Roubini's throwing out dates of financial crashes completely distorts the picture. The first date Roubini cites was a small crisis that hurt mostly the shareholders of the bank involved. The second crisis had nothing to do with the private sector, it was the result of a central bank.

But Roubini is only getting warmed up, he then claims that current crises, during the watch of the Federal Reserve, were not caused by the Fed:

Great Depression caused by voodoo laissez faire de-reg. Fed not easing after crash, no fiscal stimulus & letting disorderly bank collapses.

Read Murray Rothbard's America's Great Depression and Robert Murphy's The Politically Correct Guide to the Great Depression and the New Deal for the Fed's key role in the Great Depression. The short explanation is that the crisis was mostly caused by Fed printing in the 1920s and contraction that started in 1929, coupled with heavy regulation in the 1930s that extended the crisis, not laissez faire policies.

Roubini then intensifies his attack even further. He throws this whopper out:

Last 3 US recessions (1990, 2001, 2007-09) caused by boom/busts caused by PRIVATE sector's manias/panics: S&L, tech bubble, housing bubble

Has he not seen the Fed rock and roll manipulation of the Fed money supply. The last crisis, by the way, I chronicled coming in real time: here, here, here, here, here, here, here and here.

Does Roubini really not think the Federal Reserve was active in the markets between 1990 to 2009? Here's the chart of money printing during that period. Oh yes, just as Roubini suggests, nothing going on here---just a minor increase of a near10X in the money supply:

Now, Roubini comes out with this total distortion of the debate:

Lets shut down the Fed/all banks & go back to that bucolic autartic economy of barter where i sell you the potatoes i grow for your tomatoes.

No one is arguing that we should go back to barter as Roubini implies. Ron Paul has consistently said that the medium of exchange should be left up to the free markets. He has regularly introduced a bill in Congress calling for a free market in currencies. As a matter of fact on the floor of Congress on February 13, 2008, Congressman Paul rose to speak where he made it clear that a complex economy can not exist under barter and that a medium of exchange must exist to make for the smooth flow of commerce:

Madame Speaker, I rise to introduce the Free Competition in Currency Act of 2009. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.

This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for every-day transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.

Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.

Nouriel Roubini is either ignorant of financial history, or attempting to keep the populace ignorant. Roubini should stop tweeting on history until he is willing to tweet the facts. The rest of us should continue to study history so that we will be aware when central bank propagandists are attempting to distort history in front of our very own eyes.