Andrew Mellon's "liquidationist thesis"

Here's a little bit of economic history from the US Great Depression, a failed approach that economists do not want to repeat.

One of the most famous quotes from the depression is Andrew Mellon's advise to the president:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”

Andrew Mellon was Treasury of the Secretary under then President Herbert Hoover (1929-1933). Mellon opposed government intervention and bailing out failed banks. The economy would heal itself naturally after everything had failed and been sold-off in one gigantic fire-sale, he thought, but in the end Mellon's approach failed to bring the Great Depression in the US to an end (Read paper and quote by Eichengreen and paper by Brad De Long). Here's the full quote from President Herbert Hoover on the advice given to him by Mellon:

...the “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “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 the wrecks from less competent people”... (Source: U.C. Berkeley Economist Brad De Long).

Or more recently Fed Chairman Bernanke reflecting on the thesis:

It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon's infamous 'liquidationist' thesis, that weeding out "weak" banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks--which would have intervened before the founding of the Fed--felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view. (Source: Fed Chairman Bernanke speech to honour Milton Friedman, November 8, 2002, link)

In some ways Andrew Mellon's failed approach resembles the IMF austerity programmes after the 1997 Asian economic crisis that economist Joseph Stiglitz criticized so vehemently in his book Globalization and its Discontents (2002). 

Foreign Minister Khun Kasit Piromya's speech (Post Forum 2009)

Notes on the speech of Thailand's new Foreign Minister Khun Kasit Piromya last Thursday at Post Forum 2009. Notes based on the simultaneous translation into English:

Title: Thailand's image in the world.

* Is the kitchen clean?
* Is the fish sauce real?
* Is everything healthy in the kitchen?
* Is the food cooked by world class chefs?

* We have stability, transparency, and accountability...
* Our kitchen is ready to go...
* High quality food is just around the corner....

* Policy to bring honesty to bureaucracy
* No vested interests, double interests
* Prime Minister Abhisit is a leader who meets international standards.
* The work of 3-4 years in the opposition.
* Thailand's image in the world starts at home, putting our house in order.
* The transition has taken place peacefully in line with the constitution and the democratic system. This is a point we can sell to foreign states.
* Prime Minister Abhisit will not exploit government organs to to exploit differences or punish dissidents.
* Will not block public access to information or blindfold people.

Summary from the Post Forum 2009 web page:

The government will follow the rule of law, and will work transparently to restore Thailand's credibility in the eyes of foreigners, Foreign Minister Kasit Piromya said at Post Forum held Thursday.

"The government will not use the law to find fault with those with different opinions," Mr Kasit said. "We accept differences in points of view."

The foreign minister compared Prime Minister Abhisit Vejjajiva to world's renowned chef, who cooks Thai food for foreigners. His sous-chefs are Deputy Prime Minister Kobsak Sabhavasu and Finance Minister Korn Chatikavanij, he added.

Food cooked from this government is made from clean and fresh ingredients, and it is made in clean kitchen, he said.

Mr Kasit emphasised on the government's coming into power, saying that the transition between the previous government and the current one was smooth and peaceful, and following the democratic process.

He also said that the premier is an open-minded person, adding that he is willing to listen to opinions from the opposition as well as from members of the coalition government.

Cash grant of 2,000 baht to Social Security Fund contributors (Post Forum 2009)

When the first phase of the Abhisit government's fiscal stimulus measures were unveiled on Tuesday there was immediate criticism. Why only give money to workers who contribute to the Social Security Fund?

...a scheme to grant a one-off 2,000-baht allowance to eight million employees under the Social Security Fund and 1.4 million civil servants making less than 15,000 baht per month came under the most fire yesterday (Source: Bangkok Post, 15-01-09, link)

The first reason was pure speed, an immediate fiscal jot to the economy. It is easy to identify who these people are and quickly disburse the money.

The reasons behind the measure were explained in greater detail at the Post Forum last night. The cash grant seems more reasonable given the explanation:

1. Is actually a tax rebate, not a cash hand out.
2. One lump sum payment of 2,000 baht, cash-in-hand. Not 2,000 per month.
3. People in the Social Security Fund (SSF) pay taxes. Want to reward them.
4. 40 million over age of 18 not in tax system.
5. The Social Security Fund (SSF) provides rich data about people who pay into the fund each month from their pay checks.
6. 15,000 per month or less is considered a low-income in SSF.
7. There are about 8 million low income people in SSF.
8. Low income: 300 baht payment into SSF per month X 6 months = 1800 baht (roughly 2000 baht)
9. Well-off people lock up tax rebates in their bank account instead spending it and increasing consumption in the economy.
10. Grants only given to people that can have their incomes easily verified and tracked. SSF allows for verification and tracking. 
11. One trillion baht has been used to help farmers. People with regular salaries who pay taxes have not been helped.
12. Typically Thai households would save 30% of any increase to income.
13. Low income households save less than 10%. 
14. Low income households also need an extra 2000 baht more than others.

In fact there are a lot of people in rural areas with decent sized incomes who pay no income taxes at all.

The business plan of the rural door-to-door retailer Singer is based on this very idea. They find credit worthy individuals with decent incomes who pay for products through monthly installment payments. This include some vegetable sellers in the local market: 

...if you purchase from the hypermarkets you will need to provide a lot of documents. You have to remember that there is a large population in Thailand willing to buy and having the money to do it but does not have the required paperwork, and I know this because I did canvass to fully understand the market, the majority of the population does not have the paperwork, but if you visit a potential customer and see a nice house, a good car, making money selling vegetables, this potential customer should not be rejected (Source: Bangkok Post, business, 05-09-08, link)]