It might be useful to quote Rothbard in depth on the “myth of the ‘great depression’ of the 1870s.

Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income [emphasis mine]? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.

And he continues:

It should be clear, then, that the “great depression” of the 1870s is merely a myth – a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. …  Unfortunately most historians and economists are conditioned to believe that steadily fall prices must [emphasis original] result in depression: hence amazement at the obvious prosperity and economic growth during this era.

Rothbard. 2002. A History of Money and Banking in the United States: The Colonial Era to World War II. Pp. 154-55

Appears to be a very complete explanation.

Walter Williams, who is a member of the college’s board of trustees, gave a positively Rothbardian talk last Saturday. He started out by telling the assembled that he would discuss “fundamental principles” necessary to “preserve the blessings of liberty.” “The first principle of a free society,” he said, “is that each person owns himself.” And “the direct implication of self-ownership is people must own those things they produce.” “The idea of self-ownership” he continued, “is what makes slavery, murder, rape, assault, extortion, theft, and the like immoral acts.” The market economy not only preserves these fundamental rights of property, but brings into being a prosperous middle class and permits the leisure and extended division of labor necessary for civilization. In the market, income is earned by serving others and can be used for genuine charity towards those in need.

Our social problems do not stem from the market, but from the state. “The great problems that confront our nation,’ he said, “have their roots in morality where we’ve asked government to commit immoral and unconstitutional acts.”

The charge he gave to our graduates was “to be moral yourself and to try to sell to our fellow man on the superiority of personal liberty and its main ingredient, limited government.”

If you have suffered through a commencement speech recently, console yourself with his speech.

Meanwhile, in Europe, where Greeks have been pulling money out of banks steadily since the first of the year, loan to deposit ratios are much higher, as this chart reflects.

From Zero Hedge’s vantage point,

With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm. Only this time, since what little unencumbered assets remaining have already been pledged to the ECB, there will be no quick LTRO collateral-type fix this time.

Today, Murray N. Rothbard shows up in Switzerland’s most prominent newspaper, Neue Zürcher Zeitung (NZZ), in an article titled “Dangers of the paper money system”:

http://www.nzz.ch/aktuell/wirtschaft/uebersicht/gefahren-des-systems-mit-ungedecktem-papiergeld_1.17034050.html

Rothbard is noted as being the leading figure of libertarianism and for having blamed the Fed for being an evil inflation machinery, supporting commercial banks in their inflationary efforts.

I guess the NZZ journalist deserves some applause!

Nevada has the highest percentage of upside down homeowners at 67%.  And while I don’t know for sure, based on stories from people in the real estate business in Las Vegas, there are likely thousands of homeowners in that city who not only are not current on their mortgage payments, but haven’t made a payment in many months.

Zillow has this very cool interactive negative equity map showing a large percentage of homes in Clark County Nevada are underwater more than double the value of the home..  Arizona’s Maricopa Country and Ventura County in California also have sizable populations of homeowners in the same predicament.

Alejandro Lazo writes for the LA Times,

In roughly 10% of Southern California cities, 1 of every 5 homeowners with a mortgage owes double the value of the house, according to the data, released Wednesday. As sales and prices improve, some economists expect homeowners who have been stuck in underwater properties to try to sell their homes, muting any significant price appreciation.

While people aren’t walking away in droves, people are stuck where they are and not able to take advantage of job opportunities.

“People don’t like to walk away from something they have put money into,”Richard Green, director of the USC Lusk Center for Real Estate, told the Times. “People seem to hate realizing losses.”  Yes, indeed.  In Chapter 9 of Walk Away I point out,

Underwater homeowners aren’t walking away because they feel a duty to satisfy their lenders. It’s because they don’t wish to feel the regret of buying at the top of the housing market using too much debt.  And instead of doing the financially rational thing and walking away,  some keep paying, rationalizing that they are duty-bound to pay the note until the bitter end, but secretly hoping their financial acumen will be resurrected by a rally in home prices. A prospect that in many
cities is hopeless.

Experts have been calling for the bottom of the housing market each year since the crash, and prices continue to tumble because of this overhang in negative equity.   This year is no different.  Even investor savant Warren Buffett told CNBC he’d buy a couple hundred thousand houses if he could.

If Mr. Buffett comes calling, and the bank will approve the short-sale, take him up on it.

I have one small but obtrusive nit to pick with Bob, however.  Bob links to a blog post by Steve Horwitz, which he praises as “a good job explaining why Krugman’s understanding of US banking history is flawed, because we didn’t have laissez-faire banking in the late 1800s.”  Clicking on the link I found that Horwitz started out promisingly enough, arguing, contra Krugman, that late 19th-century America “was emphatically not a land of minimal government in banking” and that “the federal and state governments played a huge role in the banking industry and it was those regulations that  were responsible for the pre-Fed panics.”  I was excited to read more, but then my heart sank when Horwitz listed the two “most relevant regulations” in generating these panics as:

 1) the prohibition on interstate banking, which created overly small and undiversified banks that were highly prone to failure; and 2) the requirement that federally chartered banks back their currency with purchases of US government bonds, which made it prohibitively expensive to issue more currency when the demand rose, leading to the currency shortages and resulting panics that culminated in the Panic of 1907.

Huh?  These regulations were of almost no significance in causing the cyclical booms that culminated in the Panics of 1873, 1884 1893, and 1907.  Horwitz never mentions the underlying cause of these cyclical fluctuations: the establishment of a quasi-central banking cartel among seven privileged New York banks resulting in the almost complete centralization of U.S. gold reserves in their vaults by the National Bank acts of 1863-1864.  This New York City banking cartel was able to expand willy nilly the monetary base and the overall money supply by expanding their own  notes and deposits on top of gold reserves.   Their notes and deposits were then used as reserves by lower tier banks (Reserve City Banks and Country Banks) on which  to  pyramid their own notes and deposits. This is well understood even by mainstream monetary historians.  For example,  John J. Klein (Money and the Economy, 2nd ed., 1970, pp. 145-46) pointed out:

The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of . . . reserve pyramiding and excessive deposit creation by reserve city and central city [New York City] banks.  These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.

Moreover, banks, especially the larger ones, were encouraged in their inflationary credit creation by the firmly entrenched expectation that they would be freed from fulfilling their contractual obligations in times of difficulty by the legal suspensions of cash payments to their depositors and note-holders that recurred during panics throughout the 19th century.  In addition, under the National Banking system,  the New York banking cartel had formed the New York Clearing House which was empowered to issue euphemistically designated “clearing house certificates.”  These were in essence extra bank reserves that were created out of thin air to bail out errant banks during panics.  Ludwig von Mises identified these cartel certificates as an inspiration for the formation of the later Federal Reserve System as a lender of last resort to over-expanded banks, a function that introduced moral hazard into the banking system.  Commenting on the intentions of the advocates of a central bank for the U.S., Mises wrote (p. 126)  in 1928:

Among the reasons leading to the significant revision of the American banking system [i.e., the Federal Reserve Act of 1913], the most important was the belief that provisions must be made for times of crisis.  In other words, just as the  emergency institution of Clearing House Certificates was able to save expanding banks so should technical expedients be used to prevent the breakdown of the banks and bankers whose conduct had led to the crisis.  It was usually considered especially important to shield the banks which expanded circulation credit from the consequences of their conduct.

Horwitz seems to imply that the panics were  isolated events that were somehow caused by sudden monetary stringency when in fact the very opposite was true.  As Rothbard shows in his masterful discussion of the National Banking era in A History of Money and Banking in the United States (pp. 132-79), every panic was preceded by an expansion of the money supply. And during the panic of 1873, there was no contraction of the money supply, while there was a very mild one in 1884.   As a free banker, I would have expected Horwitz to  counter Krugman’s nonsense by pointing to the inflationary, quasi-central  banking cartel that existed during the Gilded Age, rather than carping about minor regulations that may have curbed the ability of banks to inflate their way out of difficulties caused by previous inflation.  And why no mention of the banking cartel’s “clearing house certificates” as fostering systemic moral hazard and undue credit expansion among banks?  Doesn’t Horwitz ascribe to the oft-repeated free banker doctrine, “Every bank on its own bottom.” Finally, how does Horwitz square his idiosyncratic financial-regulation theory of panics and recessions with the Austrian Theory of the Business Cycle?  He sounds like a supply-sider to me.

Getting back to  to Bob,  I would suggest that for a complete refutation of Krugman’s disingenuous claim that laissez faire banking reigned supreme during the 19th-century, he should  direct readers to Rothbard’s discussion mentioned above.

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