At the onset of the Great Depression, then treasury secretary Andrew Mellon became a very unpopular public servant by advising president Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
Popular interpretation, particularly among Keynesians and other conventional economists, will have you believe that Mellon’s advice was tantamount to disaster, ushering in the worst dynamics of the depression years.
Yet, we all fully accept that the "roaring 20s" brought many rotten excesses not the least of which was over-indebtedness and excessive stock speculation.
Similarly, today it’s generally accepted that we have become unsustainably indebted (households, firms, the state) while simultaneously participating in two of the largest speculative bubbles in human history in the form of internet stocks and housing.
We acknowledge that the “rottenness” is a direct result of many years of easy money, financialization and speculative behavior… we all know that the cost of living, particularly as a consequence of housing prices, is too high… we have a hunch that people don’t work very hard yet the government has seen fit only to prop in an Keynesian effort to not repeat the “mistakes” of Mellon and the response of the early 1930s.
So, how can government propping present a better path through these troubling economic times?
Would it not be absurd for today’s administration to suggest “prop labor, prop stocks, prop business, prop real estate… it will preserve the excesses and rottenness of the system. High costs of living and high living will be safeguarded…”?
In any event, however slowly, the excesses will continue to purge.
On that note, the latest read of business bankruptcies indicates that chapter 7 (total liquidation) filings are up significantly on an annual basis and now sit at a level not seen since the late 1980s.
In the second quarter of 2009 there were over 10,600 chapter 7 filings, nearly double the average seen throughout the 2000s and even significantly higher than the filing spike seen as a result of the 2005 legislative changes.