From a small northwestern observatory…

Absolutely riveting piece in Newsweek this week by Harvard Prof. Niall Ferguson titled “The Feds Critics are Wrong:  We Need to Avert Depression.”  He notes the significant parallels between the current financial crisis and the Great Depression.

In short — and I encourage you to read his piece and not just this synopsis — we often mistakenly think of the Great Depression as starting with the U.S. stock market crash in 1929.  Ferguson points out that there were really two depressions, the one that started in 1929 and the subsequent banking crisis that began in 1931 when European banks began to go bust.  This moved back across the pond to the U.S., and eventually led to our “bank holiday” in 1933.  This second crisis probably had longer and stronger impacts than the first, and wasn’t really ended until the arms buildup preceding WW-II.

It was this spector that Ben Bernake (who was a Depression-era scholar in academia) had in mind when he catalyzed the bank rescues in 2008, and Ferguson makes it clear that we are no where near out of the woods yet.  Ferguson encourages leaders to read Friedman and Schartz’s Monetary History of the United States, which he calls the “single most important book about American financial history ever written.  They note that the panic of 1929 turned into a depression because of avoidable errors by the FED.  Fortunately, Bernake is well aware of this history and is loathe to repeat those mistakes.  However, his views aren’t fully accepted — or politically acceptable — by our European allies, who are unfortunately in the driver’s seat right now.

Tim Geitner is in Europe this week, with an array of meetings in preparation for Thursday’s big soiree in Brussels.  (See David Jolly’s great article in this morning’s New York Times — click here for the article.)  Some good news — a German bond offering this week met with great success in the market, after problems with a similar bond offering back in November.  Markets seem to feel that European leaders (read:  Merkel and Sarkozy) understand what they need to do and are willing to impose the necessary discipline.  Nonetheless, one cannot understate the importance of Thursday’s meeting.