Read from the Financial Post:
Is this 1931 all over again? Paul Krugman, Nouriel Roubini, Niall Ferguson and more think so
Jun 25, 2012 – 2:43 PM ET | Last Updated: Jun 26, 2012 2:21 PM ET
The September 21, 1931 edition of the Mail and Empire reports Britain's exit from the gold standard.
Is the world about to repeat the economic catastrophe of 1931?
A growing chorus of economists of all stripes thinks so.
Sound familiar? asks economist Paul Krugman.
“Suddenly normally calm economists are talking about 1931, the year everything fell apart,” writes Nobel prize winning economist Paul Krugman in the New York Times.
“The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening, write Bradford DeLong and Barry Eichengreen in the new preface to Charles Kindleberger, The World in Depression 1929-1939.
“We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.
In May 1931, Austrian bank Creditanstalt, founded in Vienna by the Rothschild banking dynasty, suffered a run. Its collapse after a merger with an insolvent rival sparked a crisis that left Germany and central Europe strewn with failed banks, caused defaults in Europe and Latin America, knocked the pound off the gold standard, and forced the New York Federal Reserve by October to raise its discount rate by 2 percentage points.
“Austria’s troubles shouldn’t have been big enough to have large effects on the world economy, but in practice they created a panic that spread around the world. Sound familiar?” wrote Krugman.
The ominous clouds on the horizon are uniting economic pundits who normally find little common ground.
In their piece for the Financial Times entitled Berlin Is Ignoring the Lessons of the 1930s, historian Niall Ferguson and economist Nouriel Roubini argue that a silent run on the banks in the eurozone periphery has been going on for two years now. Greeks have withdrawn more than €700m from their banks in the past month.
Nouriel Roubini argues that a silent run on the banks in the eurozone periphery has been going on for two years now.
Their solution to the crisis would be a program of bank recapitalization in the periphery and the core funded by the European Financial Stability Facility and its successor, the European Stability Mechanism.
As well, an EU-wide system of deposit insurance needs to be created to avoid a run on eurozone banks – which the pair see as a certainty if Greece exits the euro.
“The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that,” they wrote.