Jason Zwieg is an economics reporter I've long respected. In the WSJ today (http://online.wsj.com/article/SB10001424052748704405704575596382345085258.html?KEYWORDS=zweig), he discusses an economist from the FDR era, Melchior Palyi who had insights into the New Deal that are as true today as then:
1. Banking Act of 1933, which said that banks could not hold securities that weren't rated "investment grade" by two ratings firms. Noting that in the 1920's these bonds often went under, even in the same year they were rated, he predicted that a bank following the new rules could have 1/3 of its bond portfoloio go bankrupt. Rating agencies are so unreliable, he wrote, that it would be "more responsible to stop the publications of ratings altogether". He felt that the banks had replaced liquidity as a way to handle this risk, with "shiftability" to others that would some day "be magnified into catastrophic dimensions".
2. government push for universal home ownership (1938) would "make the population fixed to the ground" by 'overburdening them with housing costs". Limited mobility of workers in this housing collapse is thought to be a major factor in our current persistently high unemployment rate.
3. "quantitative easing" by the Federal Reserve is "a sort of Santa Claus to the economic system" that can lead to "runaway inflation" and too muchpower in too few hands.
La plus ca change...
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