Paul Krugman: Partying Like It’s 1929

We're relearning the lesson that "unregulated, unsupervised financial markets can all too easily suffer catastrophic failure":

Partying Like It’s 1929, by Paul Krugman, CVommentary, NY Times: If Ben Bernanke manages to save the financial system from collapse he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here? Why does the financial system need salvation? Why do mild-mannered economists have to become superheroes?

The answer, at a fundamental level, is that ... having refused to learn from history, we’re repeating it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure. As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way. ...

Banks ... sometimes — often based on nothing more than a rumor —... face runs... And a bank that faces a run by depositors ... may go bust even if the rumor was false.

Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects...

That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.

And we all lived happily for a while — but not for ever after.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that ... bypass[ed] regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players ... seemed to offer better deals... Meanwhile, those who worried ... that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.

Comments

[esb]

Wanting the lessons that grow out of suffering without the suffering is a nice dream, but unfortunately this is never the nature of the human experience.

If real national suffering is averted temporarily, the elites (ruling and otherwise) will simply breathe the collective sigh of relief and convince themselves that perhaps the goose can continue to lay golden eggs forever. You know, the "gentlemen and ladies, man your phones, we're back in business!" thing.

I believe that the wild behavior of our central bank guarantees that the next crisis will simply be a continuation of the present crisis, though far more bubble-icious and far more intractable. The behavior of the commodity markets this week is a little warning of just how quickly the new bubble might pop when fully inflated, not the slow motion train wreck as in residential property.

Our problem is that we really do not want to solve the problem, we just want to go back to October, 2005, and continue to live that wonderful month over and over and over again,

and that is what Benjamin Bernanke and his crew are attempting to deliver,

and since that cannot be delivered, the sooner he fails the closer we are to a real and not an illusory solution.

One other thing. In one of his recent blog posts Mr. Krugman mentioned that Mr. Bernanke is attmepting to convince us that there is no fire, knowing full well that there is.

On my eighteenth birthday my father gave me my birthday present, an envelope containing a single handwritten note reading,

"If you determine that someone is attempting to mislead you,
never trust him again, not today, not tomorrow, not ever, and certainly not with your money, hard earned or otherwise."

The note is framed and hangs on an office wall,

and is the most valuable present I ever received.

I believe that Mr. Bernanke is a misleader. I do not trust him today, nor will I trust him tomorrow or ever.

What each of you chooses to believe regarding this man is solely for you to determine.

[Bruce Wilder]

I was quite impressed that Paul Volcker, on Charlie Rose, mentioned what I think is the critical role of compensation policies. That's going to be really tough, politically. Chuck Schumer can barely bring himself to contemplate imposing the ordinary income tax on hedge fund managers, some of whom are the most highly compensated individuals since Julius Caesar conquered Gaul.

But, there is a serious, serious problem with allowing executives and fund managers to walk away with multi-million dollar compensation awards, based on transitory performance, in an industry where it is child's play set up a high-risk bet which appears to pay off handsomely for a time, even when its long-term expectation of profit is minimal or even negative. Moreover, tying huge compensation to dubious and elastic accounting standards just invites fraud and abuse in the score keeping, that further corrupts the system.

That the system has been ethically challenged, I expect, will be confirmed by slipshod record-keeping. Banks, who don't really know who the real counterparty is in a derivatives transaction, or cannot document a mortgage payment history accurately in bankruptcy court -- these kinds of deficiencies may turn out to be endemic.

[Bruce Wilder]

esb: "I believe that Mr. Bernanke is a misleader. I do not trust him today, nor will I trust him tomorrow or ever."

Bernanke is a reactionary conservative, who will do his best to preserve the wealth and power of the plutocracy. He thinks that is "good", quite sincerely, and is not trying to mislead when he advocates that conception of the "good".

I think Bernanke's worldview, if you want to call it that, is ill-advised. To look at the carnage, and to still regard sensible regulation as too "burdensome" or "costly" by implicit comparison to laissez faire is almost breathtaking.

Bernanke is deeply invested in a counterfactual analysis of the onset of the Great Depression, a kind of alternative history, where wise, aggressive and artful monetary policy saves the day.

Personally, I think that view of the Great Depression is fundamentally wrong. The deflation may have been more severe than "necessary" in the circumstances, but I think serious, structural problems in both the financial sector and in the real economy, and not admittedly clueless Fed policy, were among prime drivers for the Great Depression.

Mr. Bernanke is conducting a kind of empirical test of his theory. We'll see how well he does. I am sure he will give it a full go.

[esb]

No doubt.

[gordon]

"...a civilization-threatening slump..."

Civilisation-threatening? Actually, I don't think the Depression threatened the abandonment of cities and reversion to semi-barbarism along the lines of the Dark Age. What it did threaten was social revolt, as large sections of the population both in the US and Europe saw, or thought they saw, the final collapse of capitalism as they understood it. In Europe, Fascists and Communists battled for the succession to a failed liberal democracy on the streets of many cities, and the US ruling class became seriously alarmed for its future.

I'm sure Prof. Krugman understands this, but doesn't want to appear divisive at this delicate moment. Nonetheless, I wish he hadn't said "civilisation-threatening". The sorts of compromises over regulation, inequality, the position of labour, social services and so on which the US ruling class made under the New Deal and later (sacrificing much in order to save more) may well have to be made again, reversing the trend of the last 25 years or so. I think there is a good chance they would work again. What is being threatened, therefore, isn't civilisation but a sort of decayed, semi-paralysed, Wiemar-style liberal democracy in which ambitious and unprincipled people have been able to enrich themselves at social expense, untouchable by impotent or corrupt regulatory institutions. The collapse of that isn't the collapse of civilisation; on the contrary, it may be the resurgence of civilisation.

The Federal Reserve can't manage such a process of renewal by itself. The most worrying scenario is one where the Federal Govt. is allowed to avoid responsibility while the Federal Reserve becomes increasingly discredited by failed attempts to restore a status quo which isn't worth restoring. But perhaps that is a process which is politically necessary; things might have to get worse before they can get better. One can only lament the human cost.

[bullbust]

http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html

The normally sensible Paul De Grauwe called for a suspension of mark-to-market. This first part of his article argues that solvency and liquidity issues can't be easily picked apart:

This interconnection between liquidity and solvency problems is em bedded in the activities of banks and financial institutions that fund long-term investments with short-term loans. Withdrawals trigger solvency problems, which in turn become signals for further withdrawals, creating liquidity problem

While this statement is true, when most commentators argue that the current credit crisis is a solvency, not a liquidity crisis, they are not referring to financial institutions, but the underlying borrowers, in particular overstretched homeowners who cannot make their mortgage and consumer loan payments. Thus to shift the focus to solvency versus liquidity at an institutional level is because they hold bought assets that are now overpriced due to the deterioration in creditworthiness.

The failure to acknowledge the problem with the underlying holdings is where his argument runs afoul:

Today the accounting rule of marking to market is driving us at high speed into the abyss. A speed limit must be imposed. It can be achieved only by temporarily allowing financial institutions not to mark to market. This will make it possible to keep the assets on their books for a while at their previous values (or historic costs). If this is done, the spiral will be slowed down. Prices of many financial assets will recover because they are fundamentally sound. Their value is artificially pulled down by the liquidity-solvency spiral.

Slowing the spiral will prevent more innocent bystanders from being caught by the whirlwind. It will, of course, not solve all financial problems. Confidence in the financial system must be restored so that the market can start co-ordinating again towards a good equilibrium.

As nice as this sounds in theory (and De Grauwe isn't alone in advocating this idea), it won't provide the desired benefits. Yes, it will put brakes on troubling "financial accelerator" by which writedowns lead to balance sheet shrinkage which leads to further deleveraging (witness tougher margin requirements imposed on hedge funds, which leads them to deleverage, or sell assets, and some of the selling may depress prices of assets held on balance sheets elsewhere to lead to further margin calls and/or writedowns).

But there is no obvious way out of this box, for the cure is as bad as the disease. The first and second acute phases of the credit crunch (August-September and November-December) occurred because banks were hoarding liquidity and were reluctant to lend to each other. In crude terms that was because they perceived risks to be high (hhm, wonder why, probably the state of their own finances) and couldn't tell who was sound and who wasn't, therefore no one could be trusted very much.

Less transparency will only make that worry even worse. It might alleviate the pressure in certain sectors of the market where lending is collateralized (ie, among brokers and hedge funds) but will exacerbate the interbank worries. And it will send a bag signal to the greater world, that things are so bad that the rules have to be suspended. This will deter outside investors from recapitalizing troubled firms, since they won't trust their books.

[Balance]

"...in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans."

This only worked until the high inflation period made savers lose confidence in the dollar as a store of value. Savings account interest rates did not keep up with inflation, even before taxes. Americans gradually switched to saving money by building an addition onto their homes, as homes were considered to be an inflation hedge.

"...replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages..."

Yes, except that it was foreign savers who did this, as the US savings rate is negative. Building an addition onto the home is consumption, as storing value in this form is not available to loan out.

US policy takes care of the needs of borrowers, but completely ignores savers. That is why the savers/borrowers ratio is so out of balance in this country. Most people simply do not save in a form that loses purchasing power over time.

[SGC]

Is this a difference between 1929 and the present: It's pretty well documented that the biggest commercial banks in this country were literally risking the bank in recent years (Chuck Prince's inability to stop dancing, etc. ) Was this equally true of the 29 - 30 era? My impression is that the banks were in general more cautiously managed back then, but many just got caught up in the crisis. Am I wrong?

[STS]

SGC:

I believe the banking practices were less exotic, but leverage was all the rage in the later 20's. Some of the key Fed moves were to "tap the breaks" on the margin lending (by raising rates) which was fueling massive stock speculation. I think the dynamics of what is lately called the "financial accelerator" were very similar. Just a cascade of people and institutions being pressed for cash and needing to sell assets to raise the cash, leading to more losses and margin calls, etc. etc. Leverage multiplies profits on the way up and multiplies losses on the way down. Same as it ever was.

JK Galbraith's classic book The Great Crash is an excellent source for this.

[STS]

Bruce Wilder:

I caught Volcker too, and had the same reaction: "follow the bonus money!" It does deeper, too. Self-dealing compensation at the top of the financial system (and corporate boardrooms more generally) is the real "campaign finance reform" issue that needs to be addressed.

[a]

So easy to blame the regulators. Sure they goofed up. But economists - with their theory that one needs to keep up consumption up, by lowering interest rates to prevent recessions, even at the expense of putting people into more and more debt - are more to blame.

[Leverage]

"Leverage multiplies profits on the way up and multiplies losses on the way down. Same as it ever was."

Yes, leverage is very dangerous. Highly leveraged items must never be allowed to enter bubble territory. Either eliminate excess leverage (margin reduced to 50% on stocks), or manage the price of highly leveraged items to prevent bubbles. Non-leveraged items can seek their own market price levels, as price volatility in non-leveraged items poses no threat to the credit system.

[bakho]

PK is spot on about the regulation. Many of the bad loans were the financial sector lending to people with inadequate income which gets us back to redistribution. Better regulation would eliminate downward redistribution by "loan shark" or "company store" predatory practices. However, regulation does not solve the redistribution problem which PK has extensively covered in the past.

After 30 years of "taxes are bad" redistribution is "soaking the rich" rallying cries, we are seeing the negative effects of concentration of wealth. When the public figures out that concentration of wealth is a blight on our economy, we will be able to start down the road to recovery.

Lowering interest rates is the Feds way of compensating for lack of fiscal policy that raises minimum wage and redistributes more of the economy downward. Solutions to our current problem must include a downward redistribution because many of the problems stem from too little money at the bottom.

I agree that taxation is part of the solution. We need a "windfall profits" tax on investment returns from the past 3 years to pay for the bailout. Speculators should not be able to get rich by gaming the system and externalizing their costs onto the general public.

[Robinia]

Krugman takes the broader view and hits it precisely-- we have, in fact, tried to unlearn some very painfully learned truths about how capitalism and the financial system work (and don't work). Regulation is not a burdensome option, it is a necessity that we evade at our great peril.

Now, for a steady, compassionate view that is yet a tad wider-- indeed, FDR's challenge renewed: what, oh, what will we do with all the broken losers and their families? Unlike Bear Stearns, real people can't simply be merged into something else that has a value greater than inflation-adjusted zero. They persist.

[atherton]

I strongly believe that all the talking heads on the 24/7 cable and mainline news channels and the print media are purposely not discussing the fruad and illegal activites in this banking/mortgaga meltdown because once the fruad is in the minds of the ordinary citizen regulation will be next, even overcoming the money parties in congress. As long as it is perceived that it is the fault of people who bit off more than they could chew of the american dream, there will be no call for reforms or needed regulation.

[ken melvin]

Great comments.

[anne]

Interest rates on 1-month and 3-month Treasuries have been below 0.5% the last several days, which is highly worrisome and suggests that there should be the sort of Federal Deposit Insurance Corporation guarantee set up for the banking sector as when Franklin Roosevelt became President in March 1933. But, the problem is not with a guarantee of bank deposit safety since there alreay is an FDIC. Rather, the problem is with the assets of non-bank-banks or investment banks.

How are investment bank assets to be guaranteed (should they be) should we proceed to a liquidity trap which is awfully close?

[anne]

The question of oversight and regulation has been continually raised from the time Rachel Carson wrote in the 1960s, and by the 1970s there were continually running advertising campaigns selling the need to lessen oversight and regulation that were to become increasingly effective through the Presidency of Ronal Reagan and beyond. Problems such as the Saving and Loan failures were settle without ever questioning the need for less supervision from business to government agencies.

[save_the_rustbelt]

I've been fairly pessimistic of late so let me try a small burst of optimism. Some of my economist friends tell me we are in better shape than 1929 because:

1) the economy is more diverse
2) ownership of equities is much more diverse, and entreepreneurship is much easier
3) the channels of information are much more diverse
4) there are more regulatory channels in operation
5) overall economic fundamentals are more solid
6) there are macro benefits to a more globalized economy

Does this mean we are ingreat shape? No. Is there a rough ride ahead? Yes. Could this have been avoided? Maybe.

[anne]

Through George Bush's Presidency, supervision in government has been fiercely use to make sure there is none beyond government advocacy of no supervision. When government biologists were ordered, twice, not to mention polar bears, for fear of focusing the public on a danger of climate change, the war against oversight and supervision had reached the ultimate in self-destruction.

There were studies and public warnings on the use high-cost (subprime) mortgages from 1999 on, with no notice from supposedly supervisory bodies.

[paine]

volkish story telling
by
ooonkle paul :

"What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931"

if that was the cause
what explains the prior 100 years of cycles
NOT called great depressions

a purer gold standard system ???

if regs prevent 30 type runs apon runs

what worked its magic in say

1873 ????

1894 ???

regulations ???

silver strikes ???

or were we building all those years
from waterloo on
toward a cataclysmic finale

the final great smash up
to the unreg-ed global hi fi system

[Patricia Shannon]

Atherton, I'm sure you're right.

[paine]

"solvency and liquidity issues can't be easily picked apart"

not in a full credit system
i was
touched by some wharton school egg face
talking about long flight capital

his words more or less

"if they'd been able to hold on
their bets would have won "

if they'd been able to hold out

ie credit lines were continued

once we have a credit system able to produce any amount of credit necessary
if it so chooses

we are not in a regime where the distinction between
l and s has much clarity
its like ahhh all relative man...ahh relative
to the credit flows

like these keep em alive machines

you gotta pull the f in plug fast
or they go on and on
till they err ....recover more or less

[anne]

"What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931."

Unemployment, which was surely understated for a still largely rural America, went from:

1929 3.2
1930 8.7
1931 15.9
1932 23.6

Roosevelt became President in March 1933, with 35% unemplotment.

[anne]

Darn; Roosevelt became President in March 1933, with "24.9%" unemployment.

[James]

The Fed is now bailing out COMMERCIAL Real Estate?

http://jessescrossroadscafe.blogspot.com/2008/03/fed-is-now-bailout-out-commercial-real.html

[Just Another Tool (of Capital)]

I know it has been said here before... but isn't this just another instance in a long line of savvy capitalists socializing the costs of their profit-making activities? Whether it's war, deadly chemicals, job outsourcing or now toxic mortgage waste, the history of capitalism seems to be one great repetitive process of winners taking far more money than they deserve once the actual costs of their activities are fully known. Of course, once these long-term costs are known... well, we know who gets to pay those bills.

This simple fact makes the current system seem grossly unfair at best and downright criminal at its worst. I don't understand why economists can't seem to address the obvious... we the people pay a consistently high price for individuals' private profit. It makes one wonder if there is really such a thing as "private" profit.

[anne]

The first bank panic was around fall 1930, another in spring 1931. By 1932, about 40% of the banks operating in 1929 had failed; about 10,000. Credit was drying up be the middle of 1930, and had dried by 1931.

[paine]

Unemployment

anne that's like saying the guy died of bleeding

[paine]

rusty

heck ya

even diversity itself
is more diverse

[anne]

What immediately began to lessen and correct the effects of the Depression was both immeiately ending the banking crisis and the Roosevelt initiatives to create work, so that unemployment had fallen from 24.9% when Roosevelt became Presient to 16.2% by 1934. Ending the banking crisis however would not have been enough, since there was no demand for credit. The New Deal was directly active and directly effective.

I am drawing on lecture notes, by the way.

[paine]

come on folks

why were regs not needed to pull the global economy
out of all the priors

the contractions panics and such b4 29 ??
come on
we austrians are waiting

[paine]

16 %

face it anne
that was not as good as the unassisted recovery
from the serious contraction of 1894
even scaling up

are you claiming by implication
the great depression was a beast
of a different kind
from the n priors ?????

again i repeat
the von show
is waiting for your answer

[robertdfeinman]

One of my constant themes is to examine the words where everyone "knows" their definition. From Krugman:

The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.

I've highlighted the unexamined word - we.

Exactly who is "we". I learned the lesson of 1929 and I wasn't even born yet. I've never invested in leveraged instruments. I think the lesson of 1929 wasn't forgotten at all. It was that if you want to take money from rubes you need to do it without government supervision of the market.

The best way to avoid existing regulation is to invent a new market that isn't regulated. A second best method is to roll back the regulations that are in place. The government (run by those who make money off the rubes) has ignored existing regulation and even eliminated protective legislation, such as Glass-Steagall. Nobody forgot anything, they knew exactly what they were doing. (By "they" I mean financiers and the congress critters they own.)

Now if Krugman means by "we" that the public should be more wary because they were swindled last time, then he should note that this is a different public. Hardly anyone alive was an investor in 1929. The educational system does a poor job of teaching history and economics. Is this deliberate or a characteristic of Americans where each generation thinks that it can solve the issues of the day without any knowledge of what went before.

Judging by not only or financial affairs, but our foreign dealings, I vote for optimism based upon ignorance as the operative American trait.

As the old Tonto joke goes: "what do you mean by 'we' whiteman?"

[anne]

The economy, especially the rural economy, was faltering for years before the market crash in 1929. Financial income and wealth were being created from the middle of the 1920s, but income and wealth from agricultural work were decreasing and income of industrial (or non-financial company) workers was little changing.

[kthomas]

He fails to mention that it is his generation that forgot, willfuly at that.

I think he's wrong. Ideology and greed got us into this mess. Simple as that.

I live for the day when masses of angry, unemployed bankers burn down the University of Chicago.

<<>>

[kthomas]

BTW, Free Tibet!

phooey on the Olympics and Beijing's propaganda machine. paine, I found your reply to this very disappointing. There's no groping for the middle ground on this one.

[bakho]

The 1920s and 30s were a transformational time in US agriculture. Agriculture was rapidly mechanizing, newly developed hybrid corn and greatly increased yields and soybeans were introduced.

Dust Bowl: This ecological catastrophe, which began as the economic effects of the Great Depression were intensifying, caused an exodus from Texas, Oklahoma,Kansas, and the surrounding Great Plains, with over 500,000 Americans left homeless. The Dust Bowl exodus was the largest migration in American history. By 1940, 2.5 million people had moved out of the Plains states.

Millions of workers trained for low skill agricultural work had no employment. WWII gave job as soldiers to millions of farm boys. After the war, the GI BIll ensured that these workers got "retraining" through government investment. The GI Bill was a brilliant stroke that fueled a post-war boom instead of a post war collapse by dumping millions of untrained workers on a farm economy that no longer had jobs.

[paine]

"paine, ... There's no groping for the middle ground on this one."

i agree
you either stay home here as johnny q advised
or you choose your foreign monster to fight

kt we agree on much else

but not on how to contain US hegemonic global ambition

i suspect you may have supported
the genocide pre empting bomb runs over serbia
am i correct ???

[anne]

Paine, you have to explain more fully. What am I missing in the sketch? The Depression was different from any recession or panic before in severity, but what else?

[paine]

The GI Bill was a brilliant stroke
i agree totally

we nedd a jobblers bill
just like the gi bill
for every citizen
who has worked a job in america
for more then 8000 paid hours

[anne]

What is important is to always have our enemies, and always there is China, an China will always divert us from us. BTW, Free Iraq!

BTW! Who else should we free BTW and how BTW?

[anne]

We are wildly militaristic, wildly empire building, bombing from Somalia to Pakistan, here and there depending on the day, the Washington Post is happily attacking Barack Obama and Hillary Clinton for thinking we might ever actually leave Iraq and even mentioning a little leaving is too much, but we are the conscience of the world since being the world's conscience means there is always a reason not to worry about our conscience or even to have a conscience for us.

[paine]

"The Depression was different from any recession or panic before in severity, but what else"
anne you always get my indirection

that is precisely what needs to be addressed
the qualitative difference between even the deepest
and most protracted victorian contractions
and
el biggo

i'd start by reverse engineering the hi fi system
like the austrians do
only not to create some gi mutt nik rose ringed picture of hard money jacksonianism

but for the brake down of the old global system
during the great war and its non reconstruction
of a consensus system
after versailles

in contrast note the post WWII
master piece of hi fi consensus

wall street and the city oughta
praise
the generalissimo stalin
the great ogre
for concentrating minds

[anne]

Ah; I understand, and will think from the perspective of the severity on back. A helpful approach, since the severity was so profound, even encompassing an environmental catastrophe of our making.

As for Tibet, I would like to have the President speaking to Chairman Hu on the matter, and speaking publicly but I am not interested in vilifying or excusing ourselves where changing our own stance in the world might be a diplomatic device of profound significance.

[cm]

robertdfeinman: "Is this deliberate or a characteristic of Americans where each generation thinks that it can solve the issues of the day without any knowledge of what went before."

If you ever were an adolescent, and have good & fair autobiographical memory, or have had adolescent kids, it should be clear that this "ill" befalls nearly every individual and every generation.

[cm]

Except perhaps individuals and generations who during their formative (adolescent?) years went through harrowing experiences that profoundly disproving rosy-colored innocent views of how things are. (Which I cannot say of myself or my generation.)

[dd]

Regulation is good. It is trust and confidence that are essential; but there can be no trust and confidence where a government spies on citizens, privatizes its functions and permits "contractors" access to sensitive citizen data:
Candidates' Passport Files Breached
"State Department employees inappropriately examined the passport files of Democratic Sens. Barack Obama and Hillary Clinton and Republican Sen. John McCain, a security breach that forced Secretary of State Condoleezza Rice to apologize to Sen. Obama.
The episodes raised questions as to whether the actions by the Bush administration were politically motivated.
Ms. Rice said Friday she apologized to Sen. Obama for a security breach in which three State Department contractors reviewed his file on three occasions earlier this year."
http://online.wsj.com/article/SB120606170975853607.html?mod=hps_us_whats_news

The lack of confidence extends in all directions and may not be restored by mere monetary policy.

[Holly W.]

Like 1929? Maybe like 1979? -- by which I mean, it seems to me that in the course of my life since I became old enough to pay attention to the financial markets and economy, it's just been one big boom-and-bust followed by another, each one bigger and wider spread than the last. I thought this while reading PK this morning, then found Howard Gleckman's TaxVox blog entry today at the Tax Policy Center website echoing the same thing:

Just since the 1970s, we have gone though Michael Milken's junk bonds, the savings and loan crash, leveraged buy-outs, Long-Term Capital Management and the hedge funds, the venture firms and the dot.com bubble, the private equity craze, and the subprime mortgage mess. It is all a variation on the same theme. Smart guys take other people's money, leverage it by as much as they can get away with, buy stuff, securitize it, and then flip the paper for a huge profit.

What gets me is that every time we go through this, the cry from the financial industry is "Less regulation will fix the problem! Stop telling us what we can't do, and everything will be perfect from now on; we'll all behave like little angels, and everyone will get rich." And governments seem to eat this line right up, even as they end up bailing these folks out over and over.

[anne]

There is need of a chronology of financial market problems directly involving American corporations from 1979:

saving and loan
leveraged buyout
Latin American banking
portfolio insurance
high-yield bond
commercial bank
Mexican debt
bond derivative - 1994
bond derivative - 1998
auditing
subprime

These problem headings come to mind.

[Patricia Shannon]

This discussion has motivated me to go back and reread "The Cycles of American History" by Arthur M. Schlesinger Jr.
and "The Fourth Turning" by William Strauss and Neil Howe.

Didn't the Great Depression last until we entered WW II, i.e., 11 years? How long would it have lasted w/o the war?

dd, there is much reason to distrust the Bush administration. It would be unbelievable that they haven't been examining such files. But I'm sure they have access to this information already, thru the FBI and CIA. It would also be surprising if no workers with access gave into personal curiosity to look at such files.

[anne]

The mortgage market problem I prefer to consider high-cost high-variable-cost mortgages that are sold with deceptively attractive initial terms both to persons who would qualify for less expensive and safer mortgages, then packaged along with safer debt to gain a top quality rating but offering better investment returns.

Add to this, speculation on the debt packages.

[dd]

Chrysler bailout: August 1979?
Hundreds of broker-dealer failures in the 1960's that resulted in SIPC (1970)?

[dd]

No doubt Bush administration has much access; it was contractor access that was disturbing and those contractors were fired without being put under oath as to the reasons for their activities. It is more evidence of privatization of government functions that rightly belong to the democratic process that is a concern.

[dd]

But do not mean to distract thread; as my main point was trust and confidence will be hard to restore in such an environment. Bernanke can not do it alone and these type of stories do little to aid his endeavors.

[anne]

"Didn't the Great Depression last until we entered WW II, i.e., 11 years? How long would it have lasted w/o the war?"

The New Deal began to work quickly, but the damage was severe and the problem myriad and there was opposition to New Deal programs and problems with the programs which were highly experimental. The unemployment rate went from 24.9% in 1933 to 9.2% in 1937, but in that year the effects of trying to bring a budget balance and raising interest rates led to a recession in the midst of Depression.

Progress again was made from 1938, and there was progress throughout. The economy was in transition from rural to urban base, and there was a steady migration from rural areas that was always an employment problem. The New Deal however was most successful, as easily shown by looking to the support of Roosevelt.

[Patricia Shannon]

Another thing I want to reread is some books by Ravi Batra.
Something I've been meaning to read is "Manias, Panics, and Crashes: A History of Financial Crises" by Charles P. Kindleberger

What causes the end of recessions? My understanding is that at least part of it is that when stores run out of goods for which there is still demand, factories can start running again, and thus start hiring. The newly hired workers spend, which leads to more demand, etc. Now the factories are overseas. What does that mean for our future?

[anne]

[http://www.nytimes.com/2008/03/21/world/asia/21cnd-pelosi.html

March 21, 2008

On Visit, Pelosi Offers Support to Dalai Lama
By SOMINI SENGUPTA

Nancy Pelosi, the speaker of the House, seized the opportunity to stick a finger in the eye of China.

http://www.nytimes.com/2008/03/21/world/asia/21exiles.html

March 21, 2008

For Some Young Tibetan Exiles, Dalai Lama's 'Middle Way' Is a Road to Failure
By SOMINI SENGUPTA]

[Patricia Shannon]

Anne, I wasn't criticizing the new deal. I was trying to get comments/information on how the Great Depression compared with other depressions, and the mechanisms which finally end depressions. From my reading, I remember that depressions often/usually/always start from the redistribution of wealth into the hands of a small proportion of the population. But what ends them?

[ken melvin]

Anne:

"The economy, especially the rural economy, was faltering for years before the market crash in 1929. Financial income and wealth were being created from the middle of the 1920s, but income and wealth from agricultural work were decreasing and income of industrial (or non-financial company) workers was little changing."

bakho says...

"The 1920s and 30s were a transformational time in US agriculture. Agriculture was rapidly mechanizing, newly developed hybrid corn and greatly increased yields and soybeans were introduced.

Dust Bowl: ...

Millions of workers trained for low skill agricultural work had no employment. ..."

All sounds vaguely relevant.

[Patricia Shannon]

I admire the Dalai Lama and people like him. I wish we had more. But I don't think that following their peaceful ways is always the right way to go in the real world. I doubt Ghandi's methods would have been successful against the Nazis. I know from experience that being nice to bullies just encourages them.

[Patricia Shannon]

What kind of jobs do economists do outside of academia? What effect does this have on their thinking and politics?

[dd]

Time for Democrats to propose the Vietnam/Kuwait/Iraq War Veterans Full Employment and Wage Guarantee Act that assures all veterans and their spouses government employment with full benefits. It would be a start as there are many veterans who were unemployed even before the current downturn:
"The jobless rate for veterans between ages 20 and 24 was a startling 15.6% last year, more than three times the national unemployment rate of 5.1%. The jobless rate for all 20- to 24-year-olds last year was 8.7%."
http://www.usatoday.com/news/nation/2006-07-14-veterans-jobs_x.htm

Make it a patriotic issue and just maybe it would force the issue.

[Bruce Wilder]

paine: "what worked its magic in say

"1873 ????

"1894 ???"

There was magic? I must have missed that hattrick at the end? Did the woman get sawed in half? Was there a rabbit?

The downturns of 1873 and 1893, like 1929, have been termed depressions to distinguish their severity from mere recessions.

The business contraction of 1873, according to the NBER was the longest in American history -- over five years. About half way through, its severity lessened and it became a mere recession. The Depression of 1893, in NBER dates was actually two nearly back-to-back business activity contractions, each a modest 18 months or so.

These two "depressions" were not the only untoward economic events of late 19th century America. There were a series of bank panics and financial market seizures, occasioned by a general deflationary trend forced on the economy by the gold standard.

As to recovery from 1873: there was no magic. There did not need to be. The amazing thing is that the depression of 1873 happened at all, in the economic circumstances. The United States economy was experiencing the most rapid economic growth phase in recorded human history: its population swelling from massive immigration on a scale not possible before steam ships, from a high birth rate and from a general improvement in the health of the population; the second industrial revolution was underway -- steel, oil, chemicals, electricity; and the U.S. was still half a virgin continent, rich in natural resources, huge areas unsettled and undeveloped. That the country could manage a contraction in business activity amidst such an abudance of investment opportunities is a tribute to the economic stupidity of mankind; that a recovery from a business contraction could take 5 years in those circumstances almost defies understanding.

The Depression of 1893 was only a depression in the western half of the country, although industrial unemployment in the Northeast was severe for a time. West of the Mississippi, nealy all the banks and all of the railroads, save one, went bankrupt. Gold strikes rescued the industrial economies of the Northeast and the Midwest with a monetary expansion, and the economies of Northeast and Great Lakes continued to follow the path of the second industrial revolution. Parts of the West never recovered, though, and the South, mired in post-bellum poverty, continued to continue in a poverty largely untouched by developments elsewhere.

Neither 1873 nor 1893 occurred in the kind of economy that had emerged by 1930. General Electric, the first industrial giant listed on the New York Stock Exchange was just coming together in the early 1890's out Edison's interests. The Dow Jones Industrial Average was born in 1895. Nabisco was formed in 1898. Woolworth's first store failed in 1878; the chain was just beginning to emerge from loosely organized business partnerships in the 1890's. In short, the "sticky prices" of Keynesian fame were just beginning to become the beast we know.

In 1896, the agricultural economy had exhausted its potential for expansion, but had no need to shed resources. An ordinary person could still make as good a living as a farmer as in pretty much any other way. Rural, farming areas could be somewhat isolated, and overly dependent on rail links in a time before the road network had been developed and these problems were recognized. Grover Cleveland's big initiative, now forgotten, was RFD -- rural free delivery of the mail.

In 1930, the concentration of wealth and economic development in the Great Lakes and Northeast was extreme. And, the agricultural economy was steeped in extreme poverty and pandemic economic failure. A lot of resources were outside the highly organized money economy, and had no way to get in. And, the banking system, in deflation, seemed designed to take away what resources ordinary people had accumulated.

It wasn't "regulation" per se that proved necessary in the 1930's -- it was the insurance that came with "regulation" -- the adjustment of house odds in the great casino that is the economy.

[anne]

http://krugman.blogs.nytimes.com/2008/03/21/weird-interest-rates/

March 21, 2008

Weird Interest Rates
By Paul Krugman

Continuing the discussion about the weird (and worrying) state of the financial markets, here’s a picture showing just how strange things are. Normally, we just say that the Fed sets “short-term interest rates,” because all very short rates are about the same. Below is the Fed funds target rate and the one-month Treasury bill rate; they’ve always been right on top of each other.

Always, that is, until now. Treasury rates have plunged close to zero, even though Fed funds is still 2.25%. Since open-market operations take place in Treasuries, I take this to mean that the Fed may not actually be able to reduce short-term rates much from current levels — which means, in turn, that conventional monetary policy has been taken off the table. As Brad says, be afraid — be somewhat afraid.

Rates gone wild [Chart]

[anne]

http://delong.typepad.com/sdj/2008/03/paul-krugman-wo.html

March 20, 2008

Paul Krugman Wonders Whether He Is Dumb. * I Say: "NO!!"
Edited by Brad DeLong

As Clouse and Elmendorf (1997) ** write:

"Because funds-market trading is typically not collateralized, the funds rate can also differ across borrowers according to their perceived riskiness."

This has in fact been happening since last August--what the (average) fed funds rate is on any given day depends on who is doing the borrowing.

* http://krugman.blogs.nytimes.com/2008/03/20/fed-funds-question-seriously-wonkish-and-possibly-dumb-too/

** http://www.federalreserve.gov/pubs/feds/1997/199730/199730pap.pdf

[anne]

http://krugman.blogs.nytimes.com/2008/03/20/fed-funds-question-seriously-wonkish-and-possibly-dumb-too/

March 20, 2008

Fed Funds Question (Seriously Wonkish, and Possibly Dumb Too)
By Paul Krugman

The target Fed funds rate is now 2.25%. Everyone expects it to be reduced further; Citi economists predict * that it will be down to 1% by mid-year.

But I have a possibly naive question: can the Fed really cut the Fed funds rate that far? I don't mean "can" in the sense that other concerns will give them pause; I mean literally — does the Fed really have that ability?

Bear with me while I talk this through. The Fed actually conducts monetary policy through open-market operations in Treasuries: the FOMC tells the open-market desk to buy or sell Treasuries from banks until the Fed funds rate is close to the target. Normally this puts Treasury interest rates close to the Fed funds rate, since one short-term loan to a very safe customer is a lot like another.

But right now Treasury interest rates are much, much lower than the Fed funds rate — around half a percent on both 1-month and 3-month bills. Weirdness like negative rates on repos ** aside (I'm still trying to wrap my mind around that one), basically the Fed can only drive Treasury rates down by about another half-point — which would still seem to leave Fed funds well above 1%.

How is it possible for the Fed funds rate to be higher than the Treasury rates? Well, one interpretation is that banks don't trust each other — not even for overnight loans. Fed fund loans, after all, are unsecured.

In other words, the Fed funds rate may be more like LIBOR than the Treasury rate — and it may be being held up by a premium similar to the TED spread. ***

Am I being really stupid here? Or is it possible that the fear factor will soon make it impossible for the Fed even to achieve its target on the interest rate it supposedly controls?

* http://blogs.wsj.com/economics/2008/03/20/citi-economists-interest-rate-cuts-ahead-lots-of-them/

** http://www.aleablog.com/negative-repo-rates-today/

*** http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

[anne]

I am seeing short-term Treasury interest rates that I only saw before on Japanese government bonds valued in Yen. Even long-term Treasury rates actually do not make much sense. Is monetary policy irrelevant right now?

[anne]

Professionals are just buying Treasuries with no regard to rates, and not just buying 1-month an 3-month Treasuries but 10-year with barely at thought to rates. I suppose the 10-year Treasuries may be bought by institutions and turned over to clients at no fee, but why are the clients paying no attention to rates? Mutual funds are buying, of course; but clients are somewhat afraid. *

* http://delong.typepad.com/sdj/2008/03/the-liquidity-t.html

[Bruce Wilder]

Via Ezra Klein, quite a good article:
CJR: Red Ink Rising

[kthomas]

BW, that was depressing. I know you've been railing about it for years, but it must be ugly watching these chickens come to roost.

[James Killus]

Let me just add to the pretty good comments here that Krugman's phrase "civilization-threatening slump" probably refers to the worldwide political turmoil that the Great Depression engendered, culminating in World War II. If you read any contemporary accounts from 1938 or so onward, serious people were indeed worried whether or not civilization would survived the oncoming conflict.

I've had occassion to wander around a bit it the wacko parts of the blogosphere lately, and I'm seriously creeped out by the number of folks who believe that the solution to our current problems involves pre-emptive nuclear strikes upon various nations in the Middle East (usually Iran, because, well, just because).

Horrible economic times bring out the worst in many people. I'd like to think that G. W. Bush is the worst possible President that the United States could possibly have, but realism tells me that there is a much deeper down than that.

[kthomas]

JK, stay away from those types of blogs, wander in civilized places. The people who post there are not your kind of people....they are very very stupid. Those are the same kind of people that voted for GW, so what does that tell you?

[anne]

Gordon:

"Civilisation-threatening? Actually, I don't think the Depression threatened the abandonment of cities and reversion to semi-barbarism along the lines of the Dark Age."

I do not care for the expression either, but I realize on thinking of it that civilization threatening does not mean reverting to caves, for we were too many for caves, just that losing a way of life makes for the sort of chaos that those displaced from farms faced for instance. Having a fourth of households with no income, is losing a way of life that might seem permanent.

[paine]

bruce
nice thumb nail tale

i think you are empirically correct
about the sticky price versus sticky output
qualitative change occuring some where
sector by sector
and accelerated by 94

73 was among other things
--as you imply -- a railroad bust
a bit like our recent internet bust

worth noting
the era of sticky prices
cartel formation
emerged out of
the gold standards
rigorous deflation tilt
in an era of high industrial output growth

all this being said
i find only results here not causation

when the simple question of why that when not this when
still requires an answer

i like your notion of insurance
you might note
gub sponsored insurance
is really socialization
by a false name
its really a recognition
that spontaneous market's left to themselves
will fail to develop adequate insurance markets
in some crucial areas of economic activity
that forced the new deal's hand

deposit insurance unemployment insurance .....
but regs matter
hour limits wage floors
price flooors and ceilings
are second best only in the sense
angels could do it all
by markets only
err unless there was a war in heaven
and one third of the angels
became ill ... ill ... and ill ...

[paine]

come to think of it

the sudden love affair with insurance
that struck the pri sec in waves from
about 80 on
all now busting open
like so many pretty easter eggs
dumped on the side walk

proves there is a line between
insurance and socialization
and some " security type products "
can only be.... reliably supplied

at gub-point

says...

i predict this crisis
starts a new meme cluster

neo socialism

[Cynthia]

So Krugman is now smelling the "D" word in the air... Just hope this smelly word doesn't get in his taste buds, 'cause the mere thought of him tasting it is enough to make my stomach turn!:~(

[kthomas]

"neo socialism"....paine, is that you? (can't be)

I'll bet you cant wait to click your heels and Hail! to someone.

[anne]

Paine asks a question that I would have thought simple but seems quite difficult to answer, as to why the Depression was so severe; after all there ha been recessions and financial panics previously, even much extended recessions. Why was this different? Why did Sweden recover so quickly, even if Keynesian policy was used from the beginning? What was so different here beyond policy which was at least comparable to Sweden's?

[kthomas]

Sweden is a poor example. Her people are too homogenous and too happy to compare with the rest of humankind. Women run Sweden, that is the biggest difference. Women dominate Swedish culture.

[anne]

Remember, if monetary policy is of little avail from here, Japan used fiscal policy massively to minimize the effects of recession and I have wondere whether she was more effective than we understand. Though Japanese growth was awfully slow through the period of deflation, the deflation may have given a poorer sense of the Japanese economy than realistic.

Japanese friends and family complained, but through the period never considered themselves threatened nor generally found others so. Japan was gloomy but fairly bustling to my surprise in visiting, and when I would ask about this I was agreed with.

[anne]

Seriously though, I do not know why the Swedes women or men adopted a Keynesian approach so readily and fully. I must find out.

[Mark Thoma]

I had this on the post about the zero bound, but took it out as the post was running long:

Paul Krugman: http://oxrep.oxfordjournals.org/cgi/reprint/21/4/515

Is Fiscal policy Poised for a Comeback?: I. Introduction For the first generation after the Keynesian revolution macroeconomic policy meant, above all, fiscal policy. Policy-oriented macroeconomists did not, for the most part, deny that the central bank had a role to play in fighting recessions. But pride of place went to G and T, not M or r. When Arthur Okun, who headed the most illustrious US Council of Economic Advisers ever, convinced John F. Kennedy to pursue an explicitly Keynesian macroeconomic policy, that policy took the form of a tax cut.

A generation later, the situation was reversed. Monetarism never really took hold: calls for a rigid monetary growth rule were never fully implemented, and by the mid-1980s monetarism had lost most of its policy credibility. Nor was everyone convinced that crowding out made fiscal stimulus ineffective. But the conventional wisdom was that fiscal policy was both unnecessary and unreliable as a tool of stabilization policy. Letting automatic stabilizers work was OK. But discretionary policy should, we all thought, be left up to the central bank.

Has the situation reversed again? Has the case for fiscal policy made a comeback? The answer, I’ll argue, is yes—but in a limited sense. The last decade has taught us that our intellectual grandfathers were more sensible than we realized. Given the economic conditions of the time, they had good reasons to be sceptical about monetary policy and to emphasize fiscal policy as a stabilization tool. And lately we’ve seen those economic conditions reappear—not everywhere, not as severely, but enough to make the old case for fiscal policy new again.

In the rest of this paper I briefly describe the ups and downs of conventional wisdom about fiscal policy since The General Theory (Keynes, 1936). Then I look at the experience of Japan in the 1990s, which suddenly made all the old, fusty arguments for fiscal policy seem relevant again. After discussing the more ambiguous implications of the recent US experience, I try to sum up the current state of intellectual play.

[anne]

Agreed.

[Patricia Shannon]

kthomas says...

JK, stay away from those types of blogs, wander in civilized places. The people who post there are not your kind of people....they are very very stupid. Those are the same kind of people that voted for GW, so what does that tell you?

They are very,very stupid, but they also have influence. Remember, GW got elected. We can't protect ourselves from a danger we don't know exists.

[paine]

"neo socialism"....paine, is that you?"
yes

"I'll bet you cant wait
to click your heels
and Hail! to someone."

that's national socialism kt
as in
put the emphasis on deutch
they're the guys
with the gleaming jack boots
and
the arm and heel thing
not
clement atlee

not sure i see all the way
to your total eclipse of the difference

then again
too much orwell
may have made you wooosey
i know he does that to me

[paine]

anne i figure
getting norte america out of the depression
would have been easy
if frank R had jumped directly
to the arsenal of democracy gig
in 33

after all
adolph was into it sraight off
and stalin had a five year lead

hey .....i really am a totalitarian

[dd]

The neo-con grand success in drowning government regulatory functions in the bathtub has left Treasuries gasping for air, finds stark naked debtors in a comma and the Fed's holy water fading. A little a neo-socialistic fiscal policy just might resurrect the dead.

[paine]

the Fed's holy water fading

great line wrong religion

mammon likes brimstone

[kthomas]

LOL

[Bruce Wilder]

p: "all this being said
i find only results here not causation

"when the simple question of why that when not this when still requires an answer"

Good Catholic boy that I am, I am reminded of Thomas Aquinas and his conception of cause and cause -- that God as Prime Mover is the ultimate cause of all, but nature gives natural and proximate cause which we would to well to discover, without superstition.

Historical narratives are inevitably "one damn fact after another" with no more necessary cause linking predecessor to successor than blind Homer could conjure, from the jealousy of Hera or the pride of Poseidon. Economic narratives are just as prone as any other to draw more shape from dramatic and moral conventions than from a genuine insight into analytic models and carefully considered evidence.

The prime mover of all economic activity is the individual, the voluntary community, the state, the enterprise each pursuing their business, organizing, striving, contending, succeeding, and failing. The unsolved problem of history is to summarize into a few pages of text what scant evidence is left of the lives of millions: it is a gloss, a meta-summary of collective action. History was easier, when Carlyle supposed history but the biographies of great men: in that grand day, Columbus discovered America . . . could we say that Neil Armstrong discovered the Moon?

The economy of 1873 America was an economy of millions groping to create something, which had never been -- an industrial, continental, urban leviathan. A 60 year old man, living in 1873, could conceivably remember a time, before railroads, when it would take weeks to travel from New York to St. Louis, and a town of 50,000 was reckoned a major city, and most people wore homespun clothing and ate what they grew themselves.

People behaved as they chose to behave, and if their collective behavior took a regular shape, it was a shape, which they, themselves, were scarcely equipped to discover or name. If we were to study a blind man's movements, would be better guided to infer his intention from his path or his destination, or should we ask why he keeps walking into walls?

"Cause" in the economy comes down to economic actors intending, contending and trying and failing and compromising, not fully understanding their own situation or how the economy or their local part of it works, and what actually happens is a collective outcome of that contentious, fundamentally stupid and chaotic process.

At best, I think, economic analysis can be applied in retrospect, to identify the emergent economic problems and stresses and the emergent institutional response, and how the latter fell short of the challenge of the former. So, yes, in my little thumbnail sketches of the economic past, I am inclined to highlight "symptoms" -- the stress and the falling short. At its base, historical economic "cause" mostly comes down to people trying, not knowing what they are doing, and failing, and then because they are human and a little crazed, trying the same damn thing again. Fundamentally the economy is organization to solve the economic problem, and solves the economic problem only up to some limit, imperfectly far short of any ideal.

In our own day, we have the advantage of having lived all of our lives in a fairly well-organized economy, shaped by reliable institutions and expectations worn by habit into a bare glimmer of awareness. The novelty of personal computers and the internet can scarcely be compared to the novelty of cheap steel, oil, railroads, or electricity in the 19th century; or the novelty of auto, airplane, radio and television in the first half of the 20th century. The great technical advances of the last 50 years have mostly fallen into well-worn institutional grooves and expectations that have channelled even massive advances into familiar shapes: stage to movie to television to internet -- successive revolution as evolution.

This worries me a bit. Brad DeLong summarizing Marx's 19th century view of the industrial revolution and the "causes" at work had this to say:

"Marx believed that even though the ruling class could appease the working class by sharing the fruits of economic growth, they would not. They were trapped by their own ideological legitimation--they really do believe that it is in some sense 'unjust' for a factor of production to earn more than its marginal product. Hence social democracy would inevitably collapse before an ideologically-based right-wing assault, income inequality would rise, and the system would be overthrown. The Wall Street Journal editorial page works day and night 365 days a year to make Marx's prediction come true. But I think they will fail."

Marx was certainly right that the ambitions of the would-be plutocracy was a political and economic causal force, and DeLong is correct to identify the Right as a continuing political and economic causal force. I dare say the Right may have had something do with dismantling the New Deal and creating the conditions for the current crisis. Although there may have been some overreaching, they did not do this from economic ignorance; the economic understanding of the Right, the clowning of Larry Kudlow notwithstanding, is excellent -- some of the best economists of the last generation are right-wing nutcases, including Greenspan and Bernanke, if I may be so bold. Looking through the Nobel Memorial Prize awards of the last two decades is depressing for its revelation of extreme and reactionary political prejudice and wilful ignorance.

Economic theory, hijacked by an anti-institutionalist libertarian bias sometimes seems more determined to forget what it used to know than to learn anything new. Rational expectations happened after I was completely focused on industrial organization, but from afar it looked liked a determined effort against all reason and evidence to resurrect Say's Law and a self-equilibrating system ripe for laissez-faire. It was not long ago that macro-economics had almost convinced itself that the liquidity trap of the 1930's was an aberration, almost a theoretical impossibility; Japan's example surprised a slumbering profession. Right now, there's a very active movement in economic history to erase the 1873 Depression from the history books and to minimize the trauma of 1893 -- didn't happen, much exaggerated, look growth continued, deflation is not so bad, yada yada.

The development of the system of economic institutions is a collective learning process. If I were to outline the "causes" of this, or that in economic history, in detail, the details would be people with imperfect understanding and conflicting goals failing to figure stuff out, and drawing the wrong lessons. In the aftermath of the election of 1896, as a series of gold strikes around the world, combined with technological advancement in gold smelting, launched the gold-standard world on the course of a pleasant inflationary expansion of international trade and industrial development, the American electorate concluded that William McKinley was practically a saint [no, really, people believed that of him -- I wouldn't make it up. William McKinley was last American President to have served in the Civil War -- his job had been to serve coffee; so one of the biggest monuments at Gettysburg is a statue of William McKinley serving coffee -- beyond goofy]. The journalistic narrative of the day was that hard-money McKinley was right in his economic prescription for the country and populist Williams Jennings Bryan was a dangerous fool and the history books continue that narrative.

The country suffered through an appallingly bad monetary policy for sixty years, from the time Jackson killed the Second Bank, with only some pragmatic improvements forced by the Civil War onto reluctant ideologues, and then abandoned in misplaced enthusiasm for hard-money gold, and at the end, "recovery" came by accident, and people learned little or nothing. More substantive reform came only after the bankers' panics of 1902 and 1907, with the moral fever of Progressivism and the accident of the 1912 election.

My Whiggish nature wants to believe that rational, sensible people of good will can work together to rebuild the institutional structure of finance to function fairly and efficiently -- not to reproduce Glass-Steagall and other New Deal structures, necessarily, but to take advantage of advances in economic understanding and computer technology. But, my realist self recognizes that the New Deal system was eroded by people of ill-will and complacent self-regard for elite privilege (aka the prime necessity in making public policy to preserve and create opportunities for predatory money-getting).

Just as with the Iraq War policy, I tend to think all of the competent people of good will are on the outside observing, while fools and knaves monopolize power and opinion. Let's just hope Bernanke is not the economic version of Rumsfeld. And, that Barney Frank is a new-fangled Carter Glass.

[kthomas]

"My Whiggish nature wants to believe that rational, sensible people of good will can work together to rebuild the institutional structure of finance to function fairly and efficiently..."

If only our leadership was occupied by men of such nature.

[dd]

paine you are correct. Reminds me of those who pray for cash not thinking which way the prays are flowing.

[paine]

"Economic theory, hijacked by an anti-institutionalist libertarian bias sometimes seems more determined to forget what it used to know than to learn anything new"

determined to forget by means
of shrewd simplifying assumptions
ex - (and) im -plicit
chosen for "tractability "

"it looked liked a determined effort
against all reason and evidence
to resurrect Say's Law
and a self-equilibrating system
ripe for laissez-faire"

exactly

as with most economic "discovery"
its class interest axiologic

the arrows that fail are ignored
those that hit the bull's eye
get published and referenced

the rat-x classical revival
of the 70's
clever stymie of keynes
even if like an african violet
it could only survive
in the hot house of academe
but in there among the secluded meme racks
it could play hob with sane policy notions
and its emergence right as i began the study quest
was all the proof i needed
that in living fact
this dismal science
was indeed a part
---if an odd part---
of the greater
class struggle

a contest
worthy of Demille
like moses and his staff
against pharoah's best
a battle waged
with magic tricks performed thru algebra

and whats more

the bad guys are smart
and never sleep

[paine]

bruce
i was meant for history
but i like to make toy replicas
that appear to work like the real thing

and as my x told me just this after noon

"shit if we knew what really caused
the great depression
we'd already be livin'
in the next stage of human history
and it looks from the headlines
like we aren't "

[paine]

"recovery" came by accident, and people learned little or nothing. "

sez it all ....most times anyway

paine says...

"substantive reform came only after the bankers' panics of 1902 and 1907"

and the bankers themselves had a plan

the result
was indeed subsantive reform

the reform was sorta democratic
and looked to create a balance of power