Mark Spitznagel Warns "Interventionist Policies Cause Of, Not Cure For, Busts"

Tyler Durden's picture

Submitted by Mark Spitznagel (author of The Dao of Capital), originally posted at IBD,

Time is nearly up for Ben Bernanke, the chairman of the Federal Reserve who supposedly applied his scholarly knowledge of the Great Depression to steer the U.S. to safety after the financial crisis.

In truth, Bernanke navigated a monetarist course that favored intensive intervention, following in the footsteps of many mainstream economists who grossly misunderstood the lessons of the Crash of 1929 and the ensuing malaise.

That lesson is that when corrective crashes occur, intervention is far from the cure — it is the cause.

Until we learn from the past, we will continue to expose ourselves to devastating booms and busts. The Bernanke-led Fed has only exacerbated the problem, leading us to the brink of an even worse correction.

To capture the lessons learned, we turn to a scholar of the Great Depression: Murray Rothbard of the Austrian School of Economics, who refutes the common misconception that "laissez-faire capitalism was to blame."

His contrarian and far less popular — yet more accurate — view is that the booms and busts of the business cycle result from shocks to the system caused by monetary intervention.

Specifically, Rothbard blames the 1929 Crash on loose monetary policy during the 1920s. For Rothbard, the boom was the problem; once the Fed pushed asset prices up to unsustainable levels, a crash was inevitable.

Without the meddling of central-bank intervention, the market — like any natural homeostatic system — can reestablish equilibrium on its own by allowing its natural entrepreneurial "governors" to work. Greater savings prompts longer-term production for future greater consumption (and the inverse). The natural order trumps intervention every time.

Laissez-faire, however, gets a bad rap because it has been erroneously attributed to President Hoover, who supposedly did little or nothing to "save" the U.S. after the Crash of 1929.

In this popular and convenient narrative, Hoover sat back and did nothing as the U.S. sunk into the depths of the Depression, while the activist Franklin Delano Roosevelt finally "got us out of the Depression" with the New Deal.

Hoover, however, was nothing if not an interventionist — and his actions prevented what could have been the "downturn of 1929-30" from resolving itself, just as the recession of 1920-21 had.

Instead, it was the government to the rescue, and the downturn became a depression.

The events leading up to the Crash and Depression form an incriminating trail. The Federal Reserve expanded bank reserves and its holdings of government securities, creating excess liquidity that flowed into a land boom in Florida followed by a stock bubble — the signature traits of mal-investment.

In 1930, Hoover enacted the Smoot-Hawley Tariff Act, which had the disastrous unintended consequence of impeding the importation of goods into the U.S. and obliterating the export market for agricultural products. Farm prices fell and rural banks that held agricultural assets failed.

Herein the great lies of the Keynesians are exposed — that capitalism cannot control itself. If Americans would simply Google the relevant figures, they would see that what they have been taught about government intervention is a myth.

Nominal federal spending rose from $3 billion in fiscal 1929 to more than $4.7 billion in 1932. Hoover had inherited a government surplus of about 0.5% of GDP, which had become a deficit of 4% of GDP by 1932. This increase in federal spending and the deficit went hand in hand with skyrocketing unemployment, which by 1932 stood at 23.6%.

At best, Keynesians can argue that Hoover did "the right thing," only not enough of it. (Sound familiar?)

Hoover didn't view himself as a disciple of laissez-faire either. In his acceptance speech at the 1932 Republican Convention, he boasted that "we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic."

History would show he was half right — gigantic, yes, but defensive counterattack, no. The dismal results of Hoover's policies and Roosevelt's New Deal for creating employment are arguments against intervention, which does nothing but flood the system with liquidity, like fertilizer for unhealthy growth.

Our fear of corrective crashes is misplaced. They are necessary purges to clear the financial system of unhealthy mal-investment and to allow the redistribution of resources to stronger industries. I would argue that had the government followed this path in 1929, there would have been a garden-variety recession — not a Depression.

Unfortunately, we have labored under faulty assumptions and failed logic, particularly since 2008-2009. This is the legacy that Bernanke leaves not only to his successor, but to all of us.

What we must learn from history is that the government should stop suppressing the natural, homeostatic functions of the market. Otherwise, the "cure" will prove deadlier than the disease.

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Everyman's picture

Boy, THERE is a newsflash!

icanhasbailout's picture

I'm pretty sure I posted that exact sentiment on Twitter recently

TeamDepends's picture

He was awesome in the Olympics.  What was it, seven gold medals?

Anusocracy's picture

“Chaos is found in greatest abundance wherever order is being sought. It always defeats order, because it is better organized.”

Terry Pratchett

So true.

therevolutionwas's picture

Sounds like Mises' theory in his Human Action tome.

Pure Evil's picture



"... the government should stop suppressing the natural, homeostatic functions of the market"

If the government did that then there would be no government as we know it and Obama would have never been elected to two terms much less one.

Urban Redneck's picture

With drivel like this people really shouldn't wonder why Austrians are laughed at: "the market — like any natural homeostatic system — can reestablish equilibrium on its own by allowing its natural entrepreneurial "governors" to work"

Seriously, one can (successfully) argue that the Fed intervention exacerbates the problem, but one cannot ignore the role of capital flows in the Great Depression and expect to make a sound argument (and Ben Stein level economics from Ferris Bueller's Day Off is NOT examining the role of capital flows- which "capital controls" are an attempt to manipulate - even 80 years later, Rinse, Repeat...).

BTW- the New Deal was Hoover not FDR, The marketing and "New Deal" brand renaming came under FDR, but the biggest shovel ready project at the time- Hoover Dam was actually Hoover himself (and some buddies at Bechtel) hence the name which some Democrat bootlicker named Harold Ickes changed until congress finally the balls to act after the president for life left office...

And the Great Depression version of SNAP was most definitely Hoover- who was incidentally responsible for organizing the 1920's version of Live Aid which involved millions of starving Russians- far more of whom wound up resorting to cannibalism that their US counterparts did a decade later...

During the election campaign FDR actually accused Hoover of spending too much money and wasting taxpayer dollars and promised to cut back.

And if any of this is really news to you (and you're an American) please consider hanging a teacher alongside a congress-critter at your next tar and pitchfork rebellion.

Dick Buttkiss's picture

"During the election campaign FDR actually accused Hoover of spending too much money and wasting taxpayer dollars and promised to cut back."

Yes, then he promptly expropriated the people's gold and launched a New Deal that would dwarf Hoover's meddling.

So what's your point, other than to make it clear that both parties were as anti-market then as they are now, merely lacking the money-printing privilege they were granted with the Bretton Woods agreement in 1946, followed by the free-for-all instigated by Nixon's closing of the gold window in 1971.

Urban Redneck's picture

Hoover/FDR = Bush/Obama
The Great Depression was caused by changing capital flows just as when the shit hits the fan now it will be caused by changing capital flows (in an environment of insane fiscal and monetary policy). To argue that that everything would have worked itself out if the government had not intervened is about as simplistic as blaming the Great Depression on the 1929 crash or the current mess on the flash crash or the TARP crash- it defies logic.

N2OJoe's picture

Wow, how did we EVER survive before we had an interventionist government??? Oh that's right, the market just worked itself out and we became the most prosperous nation on the planet.
Yeah, Socialism is so much better than that.

GetZeeGold's picture



Does anyone remember the 1920's depression? Where's Calvin Coolidge when we need him?

There is no dignity quite so impressive, and no one independence quite so important, as living within your means - Calvin Coolidge

I am Jobe's picture

But Debt is Wealth of the nation is what Keynesians have taught the sheeples. What a mess , o boy, might take a generation or so to correct this one. 

Anusocracy's picture

Creating wealth by printing is how the Keynesian/hunter-gatherers do it.

They have a very weak concept of creating wealth by actually doing productive work, unlike the townsfolk who learned to be productive through plant and animal husbandry and rudimentary property rights.

SpykerSpeed's picture

Meanwhile, the price of Bitcoin is above its pre-Silk Road level, $132.

But I guess it's not "real money" and I won't be able to spend it when "the grid" is down, right ZeroHedge?

PS:  How's silver and gold doing lately?

Pure Evil's picture

So BitCoin is at $132. Big whoop!

Gold is at $1272.

Those that bought gold at $250~$300 are smiling more than you.

Anyone that bought gold approximately $132 or more below the current price are sleeping well at night.

So why be a constant douche about it?

NoDebt's picture

Fair disclosure:  I think Bitcoin is an interesting curiosity at best and you'd be insane to put anything other than "play money" in it.  The "MySpace" of currencies, if you will.  Nonetheless, I own bitcoins.

Current Bitcoin price:  146.  I bought in at 49 earlier this year, as I have shared openly on ZH many times.  That's a solid triple-bagger (Not that it will last long- Silk Road just drew attention to Bitcoin once more, and when that fades, so will the exchange rate, which typically hovers around 100 or so).

Gold:  1272 vs. a theoretical buy-in at $300.  A solid quadruple, but it took a lot longer getting there.  If you bought most of yours late, as I did, averaging out around 1100-1200, it's not been a fun ride as far as investments go.  However, I don't think gold is for "investing in."  It's for OWNING.  Stick it somewhere safe and forget about it for a few decades.

ebworthen's picture

And Yellen is the Queen of the Keynesian's.

Hoo-boy! Are we in for a show!

King_of_simpletons's picture

RE: Yellen.

You are off the hook if you don't see "it" coming. If you do see "it" coming, stay quiet and ignore, better yet, act like you cannot hear other people talking, like a spaz. Come out next day in front of the TV and say "Growth is moderating". Wall street buddies will pick up the code words and ramp up the market next day.

Oracle 911's picture

Classical Keynesianism works only in ONE case, when you need prop up you production/industrial capacity (and build the needed infrastructure) in relatively short period of time (10-20 years) by several folds for whatever reason, EVERY other application of Keynesianism fails miserably.

Successful application of Keynesianism: Bismarck's Germany, Stalins Soviet Union (before the WWII) and west Germany after WWII.


PS: One more thing, you must be extremely careful from what source you borrow.

ebworthen's picture

"Lesus", wow.

It is in Latin, but still...

blindman's picture

that is latin?
those recalled coins, ironically, will probably
be worth a fortune?

Disenchanted's picture

Actually on the coin it says "Lesvs"

Is there an esoteric thing going on there? While in the exoteric world it's being pushed off as a 'mistake'


Jus thinking out loud...I'd put money on the idea that the 'recalled' coins won't all come back.



Grandson of Herod: I[L?]esvs Nazarenvs Rex Ivdaeorvm by Joseph Raymond


GRANDSON OF HEROD is a work of historical fiction that tells an alternative and controversial version of the life of Jesus. The premise is that Jesus was the grandson of both King Herod the Great and King Antigonus, the last Hasmonean king executed by Marc Antony in 37 BCE. The Hasmoneans were the Jewish royal dynasty that immediately preceded Herod. Five years of research went into building the factual underpinnings of the theory. That research was published in 2010 under the title HERODIAN MESSIAH.

moneybots's picture

"Unfortunately, we have labored under faulty assumptions and failed logic, particularly since 2008-2009."


Largely, for over 80 years.


Plain and simple it is the boom that causes the bust.  The up phase of the cycle results in the down phase.

What Greenspan did in 1998, dropping the rate to 4.75%, is what blew the top off the Nasdaq.  The late 1920's FED gave the market a little coup de whiskey and blew the top off the DOW.


Greenspan wrote back in the 1960's, that 1920's FED policy lead into the Great Depression.  Greenspan then doubled down on that policy when he was in charge, instead of avoiding that policy all together.


The problem is that the government is expected to do something.  The FED is expected to do something.  Thus they do something and it exacerbates the problem.

I am Jobe's picture


End of story


centerline's picture

Aye, Aye Captain Obvious.

moneybots's picture

"What we must learn from history is that the government should stop suppressing the natural, homeostatic functions of the market. Otherwise, the "cure" will prove deadlier than the disease."


Doesn't matter what is learned from history.  It rhymes.


The fact is that they already know.  Yet they do it anyway.  How could republicans hound Clinton about deficits, then turn around and run huge deficits when controlling the entire government when Bush Jr. was President?  It is all a game and it isn't going to stop.

el Gallinazo's picture

In truth, Bernanke navigated a monetarist course that favored intensive intervention, following in the footsteps of many mainstream economists who grossly misunderstood the lessons of the Crash of 1929 and the ensuing malaise.

I am sick and tired of this bullshit that Bernanke & Co. don't know what they are doing; that they are ignorant and incompetent.  Same bullshit as 9/11 was allowed by the ignorance and stupidity of the USSA intelligence community.  No public official (or pseudo public official) is either hung or fired for stupidity.  Good cover.  The dog ate my homework.  Bernanke understands exactly what he is doing.  His bosses were damn sure of that before they appointed him.  As Jesus said, "By its fruits it shall be known."

blindman's picture
The Life And Death Of A Massive Debt Bubble In Seven Charts
Submitted by Tyler Durden on 10/11/2013

excluding the fine points which are lost on me
the story is this.
capital is not only created and of value
but becomes a burden and then must be/is destroyed
or transferred to where it could be valuable.
some financial capital is toxic as is some
instructional capital and needs to be destroyed
or it eats away at the market participants and
kills them.
it breaks the mechanisms of the " how leverage drives
growth " triangle. but you have to ask is growth
possible or desirable in the macro or micro view.
and some market participants are terrorist and use
toxic financial capital to destroy other capital that
is not theirs so they can then buy it cheap and flip it
to someone else for a "profit" or other capital.
the point is inside a credit, economic, asset capital
growth cycle is the corresponding bust cycle which
demands the destruction of these elements in the bust
phase. the bank loan mechanism of financial capital
creation bust will lead to loss of economic growth resulting
in asset price depression and destruction of capital.
deflation. the central banks serving as the mediums for
asset reallocation from the real economy to the financial
market actors, wiping the slate clean in cephalopodic manner
for the squid to wipe your plate clean before sinking it's
beak into your neck.
the leverage boom and lending good times contained speculation
of growth and easy credit going out 10-20 years. these capital
appreciations were priced right into the assets/houses and further
leveraged. the same sort of giddiness was applied in the profligate
bond market. the slate was made very busy and full and so there
is currently no room on the slate for any capital creation to
finance the demands of the former miss allocation, fraud and usury
that is systemic in this cephalopodic money creation scam by
whatever name they call it?
the banks will be recapitalized with the deteriorating assets,
property, resources and labor of the subject populations.
that they will call a "clean slate".
that's all for now, thank the fed,
and then end it!

blindman's picture

if the effect precedes the cause
there you must be referring to
physics or "volition". there,
someone said it.....
@".. intervention is far from the cure — it is the cause." the top
there exists here a grammatical and actual impossibility that must
and will be corrected in time as it always is.
civilization is all about crazy volition and
effects running ahead of causes,
strange thought i have had.
maybe it is the mystery of the "will"
of man?
the intellectual question remains concerning the dynamic
sustainability of the contemporary will of man yet
the result will be purely physical and personal.
again everything is connected and interdependent.

Mark Noonan's picture

Good article - and I've always wondered why, when people discuss the Great Depression, they never seem to add in to their calculations the massive loss of life and wealth which had heppened just ten years prior - with WWI and the 'flu pandemic, at least 20 million fit, young people had been shorn away, mostly from the most advanced economies in the world...and that doesn't even begin to cover the total losses in the war given the amount of wealth which was literally shot out of a cannon.  With that kind of hole in the global economy, there was bound to be a very bad reaction...easy money held it off for ten years, but what happened in 1929 was completely unstoppable at some point.

yogibear's picture

Benny Bernanke is exiting at the right time. Greenspan blackballed Brooksley Born. Now Bernanke will blackball Yellen.

 Here hold the match and go into that shed (filled with TNT) so you can see what's in it.