"A Depression Buff's New Course of Study"

Can Bernanke meet the challenge?:

A Depression Buff's New Course of Study, by Carlos Lozada, Washington Post: ...It seems somehow fitting to see Bernanke -- a top scholar on the economics of the 1930s -- at the helm of the Federal Reserve in yet another age of war and financial peril.

Bernanke ... has devoted years of research to explaining how policy mistakes and financial panics transformed a 1929 recession into a worldwide calamity... If anyone can steer us clear of a similar fate today, it should be him -- right? Now history has put the self-described "Great Depression buff" to the test. ...

Nearly fourteen years ago,... I sat in ... Robertson Hall at Princeton ... struggling through Bernanke's course in macroeconomics. ... I recall tough assignments and a stressful midterm exam that had me wrestling with something called the Euler condition. (Don't ask, because I still don't know.) The exam was challenging, we were told, because a test should be a learning opportunity, not just a gauge of whether we could spit back class notes.

[R]ecently, I decided to crack open his textbook and sift through his prolific writings on the Depression... As I read Bernanke's "Essays on the Great Depression," a selection of his academic papers, what leaps out is his emphasis on the Depression as a global phenomenon. Tempting as it is to focus on President Herbert Hoover and the 1929 U.S. market crash, Bernanke explores conditions across dozens of countries ... and which central banks made the right calls.

"Arguments which focus almost entirely on the U.S. are missing a crucial aspect of the issue," Bernanke stressed... As the current downturn ricochets through the global economy ... Bernanke has coordinated interest-rate cuts with other countries and extended up to $120 billion in lending to the central banks of Brazil, Mexico, Singapore and South Korea. ...

Bernanke also emphasized that decisions by central bankers were crucial during the late 1920s and early '30s -- and nowhere more so than in the United States. In a paper called "Deflation and Monetary Contraction in the Great Depression," he offered "the clearest indictment of the Federal Reserve" and concluded that the Fed's moves were "actively destabilizing" in the crisis's early stages.

"By raising interest rates" after the 1929 crash, "policymakers contributed to soaring unemployment and severe price deflation," Bernanke explained in a Foreign Policy magazine essay in 2000...

In the run-up to the Depression, Bernanke argued, better leadership could have made a difference. ... "[W]hat we ... know is that the central bank of the world's economically most important nation in 1929 was essentially leaderless and lacking in expertise," Bernanke lamented. "This situation led to decisions, or nondecisions, which might well not have occurred under better leadership. . . . And associated with these decisions, we observe a massive collapse of money, prices, and output." ...

Bernanke praises government efforts to prop up those financial markets in the 1930s, but that does not necessarily translate into support for wider interventions. ... And although Bernanke once urged Japan to show "Rooseveltian resolve" in getting out of its own economic crisis in the 1990s, his assessment of FDR's New Deal seems lukewarm. ...

Finally, Bernanke fervently believes that the lessons of history matter. "...The issues raised by the Depression, and its lessons, are still relevant today."

He wrote those words in 2000, long before today's crisis. ... But an understanding of history may only get you so far, other economists argue, especially when we've not really been transported back to 1929. In an Oct. 18 interview..., [Anna] Schwartz ... said that Bernanke's historical smarts were his "claim to be worthy of running the Fed" but concluded that "my verdict on this present Fed leadership is that they have not really done their job." ...

For all our sakes, I hope my old professor has distilled the right lessons from the Great Depression and can discern which do and which don't apply today. If he passes this test, history will grade him generously. If not, I suspect it will be hard for the country to find solace in a new learning opportunity.

Comments

[the wrong man]

"I hope my old professor has distilled the right lessons from the Great Depression and can discern which do and which don't apply today"

Well, here’s where he turned the wrong corner:

He didn’t (want to) see those underlying fallacies. He pretends that all of this is simply macroeconomic set of numbers of this and that sorts blinking up his screen into his eyes, when obviously those singled out fallacies and their CEOs became macro as much as those numbers appear. Yes, there’s no banking anymore. Who oversaw it, who owned it and who was it operated-by? To face that is what he should done.

That was his job description. Failed here.

It were the facts, not a theory. Besides the economy there s also this “legal thing”, no one upholds. Its there - that he’s wrong, lost in politics, lacking the spine. Unable to see or to act. Or able to see, unable to act. who cares ?

He stroke the deal. With the wrong guys. His owners, on paper. He did not respect the facts, the constitution, his people, nor ethics! He turned out this Fed to both clearing joke for settlements sake and the insurer on top. For these guys to please, his counterpart saved.

First his homework had to be done, then he could operate. Without it – forget it. Time has it s ways, to stop is not one of them, so this one’s nearly forgotten.

The right guys were looking at all this from far. Refusing to be drawn-in to accomplice all that. So theory changed in-between, leaving him operating under false-now assumptions. It`s tragic to some and comic to others. The pity of it all, the sadness and sorry. Depressing it is.

And that’s what we all get for that: the greater depression.
Yes, there is one experiment to go here, but Judgment was passed.

He’ll go down that history’s drain. This way.
But so will we all.

[richb]

OK, great, so Bernanke has it all covered. This all sounds a bit familiar, though. Wasn't he saying the same thing 6 or 7 years ago? It seems the Fed and the Bush administration followed his advice to the T, and yet what were the results? Just because the US doesn't follow the exact same path as it did in the 1930's into a Great Depression II does not mean that economic policy will have worked. Another credit/consumption boom with all of the benefits accruing to the top 0.1% of households isn't going to fix the American economy.

[Sandman]

The Great Depression was a massive liquidity problem that could have been lessened by instruments to enhance liquidity. Granted, the decade still would have been "lost" but not to the level it was.

This is a massive solvency crisis ala long depression economics of the later quarter of the 19th century, which were quite wild indeed.

Bernanke knows it but won't police is banker buds.

What were seeing is massive structural damage which much like the 30's would is completely un-necessary. The market in the early part of this decade didn't want the good times to end. If the Fed had said "no mas" while the decade would have been economically weak, we would be nearing the end of the debt clearinghouse and ready for boom.

Now instead we get what happens when the police leave the field. That is what both share in the 1860's(old credit boom/bust) and 20's/00's(FED abdocating its police role allowing for the old style credit boom/bust of the 19th century.

[jm]

The problem is that the nation now playing the role the US played in the early 20th Century is not the US, but China -- the low-cost exporter with massive overcapacity.

The US is now playing the role the UK played at that time -- the aging great power wracked with debt.

[Alan]

Not only has Bernanke's solution not worked, it has not even slowed the train. More liquidity is just making more mud. You might think we would look at what did work, but radically expanding the public sector's demand, even to save the planet, is still well outside the realm of conventional wisdom.

Can we not at least admit that the free market fundamentalism is the same? And the implicit suggestion is that a tweak here with after-the-fact regulation or a tweak there with stimulus, along with mandatory large doses of Monetarist nonsense, will allow the market to save itself. The market is broken. It needs to be rebuilt, not patched up and pushed down a hill.

History may not repeat itself, but it does rhyme a lot -- Mark Twain

[Eric Dewey, Portland, Oregon]

Mark, thanks for continuing to provide posts that show the human side as well as the wonky economic side. It's also good, and reassuring, to hear that BB's classroom style was truly thought-provoking - because that, IMHO, indicates that BB is quite self-aware and understands his own fallibility.

Although everyone really should chill the fuck out, I don't see BB trying to say he's got it - I see him working hard to manage the transition from the failed Bush administration to the incoming Obama team, as well as with his counterparts around the globe.

At some point, all of us armchair Fed Chairs need to take a deep look at our own biases, and think about what would happen if we were really sitting in that chair, with most of the world hanging not just on what we are doing or failing to do, but also how we do it and what we say about it.

Because some small part of the problem here is that, on a micro-level, too many people thought that they were smarter than everyone else, and made bad decisions. A LOT of those people were really smart put A LOT of thought into those decisions, and still came out wrong. SOME of those people were dishonest, or at least disingenuous, and unfortunately a healthy number of key decisionmakers fit that description.

It's way too early to really know whether any of the actions taken are going to work; the only really good news is that whatever panic exists has not yet (at least in the USA) risen to the level to the level of violence in the streets (and yes, it has been happening in some other parts of the world, and yes, people in the USA should be concerned about it happening here - just consider the ugliness of the campaign).

[Patricia Shannon]

Am I the only one who wonders whether John Edwards was deliberately set up with that woman, in order to get him out of the race because (1) they didn't want a president who truly cares about the poor and (2) they didn't think a woman or African-American could win.

[Too Much Fed]

Maybe someone should ask bernanke about the role of TOO MUCH DEBT, WEALTH/INCOME INEQUALITY, and ASSET PRICES BEING TOO HIGH played during and right before the Great Depression.

From an earlier thread:

Patricia Shannon says...
Is any economist besides Ravi Batra saying the Great Depression was Great because of great income inequality?

Let's throw the Panic of 1873 in there too. See this link:

http://www.itulip.com/forums/showthread.php?p=52465#post52465

[Too Much Fed]

jm, YES!

From the itulip.com article and something similar:

http://www.itulip.com/forums/showthread.php?p=52465#post52465

"In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read."

[Too Much Fed]

"For all our sakes, I hope my old professor has distilled the right lessons from the Great Depression and can discern which do and which don't apply today. If he passes this test, history will grade him generously. If not, I suspect it will be hard for the country to find solace in a new learning opportunity."

I DOUBT IT because he and everyone in high-end finance seems to believe that the solution to TOO MUCH lower and middle class DEBT is MORE DEBT!

It seems to me that they believe this because MORE DEBT makes them richer and more powerful.

[Too Much Fed]

I got this?

I doubt it because bernanke and greenspan did NOT even see this coming.

From:

http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html

"U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households."

CLUELESS IDIOTS???

[erewhon]

Bernanke may have been an inspiring teacher, but he has failed as Fed Chairman, and has been unable to see the problems associated with Greenspanism. I hope that Obama fires him and Paulson in January. McGeorge Bundy was a smart man, a good lecturer and made the Vietnam mess worse.

[Jack]

That poster was more appropriate to Obama on the eve of the election, with a picture of Obama in place of Bernanke, of course. But as of now our recovery is no longer directly in the Feds hands.
But what Bernanke can do is publicly support fiscal stimulus policies and big government spending programs to give them whatever added legitimacy he can provide as a Great Depression expert.

[craig tindale]

bah humbug to Bernankes BS theories

and Ive read all his stuff as well

monetary interventionist centrally planned consumption will got the way of soviet centrally planned production

for folks who have access to the data, have a good look at Kondraitev's and Schumpeters data for the early 20 century (for those with access to a good library Kondratievs collected works is a good reference the tables at the back of volume 1). Sometimes the data tell you more than all the theories that built on it.

in that period we saw Britain in the role of America today and China in the role of America . Look at any commodity, pig iron, lead, wheat etc and it has the US and UK rough equal in 1900, by 1920 the US is using three times more of everything. In the same reference check French and English credit which ballooned in the same period, all fed by US savings.

Put aside for a second any discussion about whether long wave cycles exist, whats interesting is that Schumpeter marked the beginning of the downturn when commodities crashed in the early 1920s, 1920-29 was actually a credit driven US centric boom, looking at global markets in the same period almost every other market peaked in the early 20s, Delong has written papers showing Britain was in a bear market in equities from 1900-20.

My critique of Bernanke (from someone who is also a student of that era) is that he doesnt go back far enough and he has not idea about risk mitigation when it comes to monetary policy, it some extent and idealist who shouldnt have been let out into the real world. He totally avoids the local or international political variable in his analysis,

discussions about Ben are academic , Volker , Obama's new left hand man (everytime I see pictures of Obama Volker is sitting there next to him)is lining up Ben for the long punt.

[calmo]

Ok, EDPO (someday, I too will extend my tag so that on those tough days when I forget where the hell I am, I can still get the bus home)Because some small part of the problem here is that, on a micro-level, too many people thought that they were smarter than everyone else, [I fess up that this was the ignition point for me: micro-level people ] and made bad decisions. I wonder if you have been bitten by the Decider bug.
Me too...somewhat.
No question, I am the decider in this little box and have no VP passing me notes about which keys to press next...(ok, and there is some Parkinson's...as well as fingers that refuse to lift off some keyssssss).
I can get to this....point...business...ploblem work in progress!Although everyone really should chill the fuck out, I don't see BB trying to say he's got it - I see him working hard to manage the transition from the failed Bush administration [I see this failure in a global dimension, you micro-level people] to the incoming Obama team, [no ordinary administration, but a team, a special team...that will waste no crises?] as well as with his counterparts around the globe. Anso it seems desirable to appear sweaty hard working than cavalier (chill an B cool)...another symptom of Deciders, yes?
Busy working hard to decide ...smartly, efficiently, profitably, confidently, and persuasively for those other people (some micro, some macro) who need constant supervision.
The re-invention of czars says itall.

But I'm glad you are here helping me decide ...and work micro, macro...intoto...before itizall FUBAR, you know?

[Eric Dewey, Portland, Oregon]

Stay cool, Calmo...we're definitely in a SNAFU situation here, and in spite of the example being set by many of our leaders, panic is not really a good option.

In reality, Macro is little more than the sum total of all the Micro decisions - with added spice that the power of some Micro-decisionmakers has a lot more heft than others.

[Ken Houghton]

Interesting. My reading of Bernanke's book (I've skimmed the Macro text, but wouldn't claim to have read it, though it was used in a class) is that, while he knows that The (Second) Great Depression was worldwide, he's very clear that there were different mistakes made in different places, and rather well detailed on what those mistakes were. (Again, from a macro level, but we're really talking macroeconomics here, so that's neither surprising nor a bad idea.)

Hate to say it, but Lozada lookseven to meas if he doesn't understand what he read or that about which he is writing.

None of which is to say Bernanke's the greatest Fed Chair, but even G. William Miller wasn't stuck with a Kleptocrat-with-keys such as Paulson at the Treasury. The problem is more that he's doing the right things (circulating funds), but there's a siphon in the middle, and it's only the taxpayers who are getting a mouthful of gasoline.

[calmo]

A mouthful of what?
Ken, near master of the mixed metaphor and NOT a connoisseur of mouthwash...
Are we witnessing the poverty of Academics in BB...or just the poverty of a lone adacemic in a sea of businessmen? I can't tell you how I struggled with his denial of the housing boom, repleat w the Greenspan/Kennedy paper...
Recently attended a family member's MBA convocation and not 1 peep in the whole proceedings about the current economic/financial conditions...
No, all about staying connected to the alumni...
Enough to impart a sustained interest in your shoe laces.

Thanks Eric...I think...mostly.
I'm nibbling on this: panic is not really a good option. which reminded me of an NPR snippet from GM spokespeople/analyists that bankruptcy was not an option either. In that case (which Ackman ignores...possibly MT too) it is argued that the bankruptcy label kills sales: buyers are unlikely to buy a product whose brand is comprised by the tag "bankrupt" [check out prices on Ebay for recently defunct digital camera companies...to get some confirmation]. Persuades me.
In your (somewhat clever somewhat delightful) "panic" case, we micro people (think funny, Ken, not small...dang) NEVA N...E...V...A make deliberations which tend to lead in this direction: panic.

[Julio]

It might make more sense if you handn't cropped out the falling piano above the picture.

[calmo]

A falling piano...how civil, Julio...a musician then?
At the very least, not an Agriculture grad specializing in Manure Management & Transport...perhaps a member of Cirque du Soileil who can catch all manner of things?
I don't want to dismiss you as just a comic Julio...do you have a view of say, craig's humbug post?

[Julio]

calmo,

That WAS my comment.
It seems (mostly from other threads) that the Fed is out of tools to deal with this mess. Isn't that what Krugman (among others) have been saying?

[Julio]

calmo,

Goaded by your question I reread craig's post, this time making it past "monetary interventionist centrally planned consumption will got the way of soviet centrally planned production", but then since I haven't read Kondratieff or Schumpeter, I started thinking about the First World War and drifted off.

[calmo]

J, you sayin that MT actually cropped the photo? [I can check...somewhat...ok, a hoop to jump through to get to the source, WaPo, so I take your word for it: a real piano is suspended over BB's head, but this was edited by Mark...My apologies and condolences for/to you not being a musician or a comic...damn, it's a tough crowd tonight.]
Agree.
Out of conventional tools, but the invention and expansion of new ones (HOPE, TAF, TARP, BURP, CYA) [Ok, CYA, happening right now for me as I need to tell you that I just made up BURP...hehe...]...whose efficacy is only now being negatively confirmed.
It is largely in Congress's hands --I agree with you.

[Julio]

Bernanke's Unlimited Reconstruction Pinata?
You may have something there.
The guy may surprise me yet, and save us from a Player Piano future.

[cm]

Patricia: Considering that Edwards' mistress supposedly had his child (if that's true, but I don't think it was contested), he must have been set up quite in advance.

It's a pity that his career, not just his candidacy, was destroyed like that, but OTOH he was the one who couldn't keep his zipper closed. Similarly for Spitzer, albeit the different angle.

[craig tindale]

To much Fed

they didnt see it coming lol

pass me some of your weed Greenspan and Bernanke designed and implemented it

its a monetary rain through the real estate asset channel, that convinced homebuyers through the what Bernanke called the "wealth effect" that we are able to withdraw equity via credit and consume flat screen TVs

this "we cant detect bubble" is complete BS, they were actively creating them, Bernanke's later work 1993-99 is full of such ideas.....thats what I mean by centrally planned consumption, the central bank actively stimulated real estate asset prices through the credit channels and now they reap what they sow

[Invisible Hand]

JM,
Very good point. Historians love to criticize generals for "planning for the previous war", and Bernanke is trying to fight the previous Depression. Some of the lessons of the GD are appropriate for today, but a lot has changed since 1930. You have identified one of the most important changes -- the USA is no longer the world's largest creditor but instead is the world's largest debtor. Another (related) difference is that the USA in 1930 was living below its income in the aggregate, whereas in 2008 we are living above it. I could list more differences, but these two are among the top five, and seem to be off Bernanke's radar. The failure (or unwillingness) to recognize these differences could lead to catastrophically bad policies this time.

[Easy Money]

For a glimpse of how wrong Helicopter Ben is and has been, read the summary at the end of Doug Noland's weekly credit bubble bulletin.

Doug Noland has telegraphed this credit crisis for a decade. Just sample his archives from a few years ago to see for yourself.

We're in the hands of a bumbling idiot that had no clue what hit him, and continues to draw the wrong lessons from the great depression.

[halbhh]

It's only about confidence, absent dramatic fiscal or monetary mistakes. Confidence in turn is influence by a wide number of things. You could say a good job at the fed is like steering a ship in a storm correctly to face into oncoming waves -- this helps the odds, but doesn't guarantee an outcome.

[Bruce Wilder]

Invisible Hand: "Historians love to criticize generals for 'planning for the previous war', and Bernanke is trying to fight the previous Depression."

I would say Bernanke is trying to fight the Great Depression of his imagination, which bears only superficial resemblance to either the original or the current crisis.

[Bob Mullen]

Ben Bernanke, expert in the Great Depression, is bringing us one.

Condoleezza Rice, Kremlinologist, has engineered the resurrection of Russian expansionism.

They are comfy, playing on their home turf.