Bernanke the Savior?

by Don Boudreaux on August 27, 2009

in History, Monetary Policy, Stimulus

Here’s a letter that I sent yesterday to the Washington Post:

Praising Pres. Obama’s reappointment of Ben Bernanke as Fed Chairman, Robert Samuelson says that “We will never know whether the world might have suffered a depression if Bernanke’s Fed had not responded so aggressively.  But that is plausible” (“For Obama, the Only Choice for the Fed,” August 26).

Counterfactual history is inherently hazardous, but that Dr. Bernanke’s unprecedented aggressiveness was key to saving the economy is nowhere near as “plausible” as Mr. Samuelson thinks.

First, it’s unclear that the worst of our economic woes are behind us.  Second, and more importantly, the economic downturn of 1920-21 was in many ways deeper than the current downturn.  Wholesale prices during that recession fell by 45 percent; the Dow fell by 19 percent; and industrial output fell by 23 percent. Yet within a year of its trough the economy had recovered fully with no intervention by the Fed.

Sincerely,
Donald J. Boudreaux

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anon August 27, 2009 at 8:58 pm

So what? It’s also plausible that the economy could have bounced back from the trough more quickly than a year in the 1920s if the Fed *had* intervened. Plus, circumstances leading to the recession in the 1920s were entirely different from the ones leading to the current recession. I’m not saying I agree with Samuelson, I’m just saying you can’t really know, and when n=1 I’m unconvinced.

Anonymous August 27, 2009 at 9:12 pm

Robert Samuelson’s n also equals 1.

anon August 28, 2009 at 12:33 pm

as I said, I didnt agree with Samuelson.

sandre August 28, 2009 at 3:50 pm

“I’m not saying I agree with Samuelson. ”

A more clearer way to express it would be to say “I disagree with Samuelson”. You spoke like Daniel Kuehn, and that is your fault.

Anonymous August 28, 2009 at 2:10 am

In economics, n always equals 1.

Anonymous August 28, 2009 at 3:42 pm

????

Anonymous August 29, 2009 at 4:34 am

Countless important uncontrollable confounders. You can’t really run an experiment with n>1.

Anonymous August 29, 2009 at 2:47 pm

Well no, not an experiment (although many experiments are run – particularly to test government programs, but not for macro obviously). But uncontrollable confounders are a far cry from a sample size of one. Uncontrollable cofounders are a reason to be careful about interpreting results – not a reason to make up your own definition of what a sample size is.

Anonymous August 27, 2009 at 8:59 pm

But 1920-21 was a corrective recession, wasn’t it? The Fed did act – it raised discount rates after a period of monetary inflation, analagous to Volcker’s manufactured recession in the 80s. I may be mistaken, but I thought that was the situation.

Regardless, I think that’s why Samuelson used the word “plausible” rather than “definite”.

tw August 27, 2009 at 9:01 pm

You’re right to invoke the 1921 recession. Not only did the Fed not intervene, but President Harding cut taxes and cut government spending. And we did indeed recover in 12 months’ time.

Anonymous August 27, 2009 at 9:42 pm

But they did intervene. They raised discount rates. It was a manufactured recession. It has zero to do with a depression caused by a collapse of aggregate demand. Please someone correct me if I’m wrong – I’m no historian. But it seems to me that simply identifying 1921 with 1931 as comparable is as wrong-headed as identifying 1981 with 2008. 1921 and 1981 were manufactured, inflation-battling recessions and both ended quickly. 1931 and 2008 were impacted by changes in investment and consumption demand. They are very, very different.

Anonymous August 27, 2009 at 11:41 pm

Depressions are caused by collapses in aggregate demand? I think you have been reading too much from a book by another Samuelson. The 1920 downturn is similar to the one we presently face in that it was fueled by artificial credit expansion and misallocation of productive inputs like labor and capital. Under the advice of Mellon, Harding and Coolidge pursued policies that allowed the market mechanisms to reach a state of appropriate allocation according to demand.

Aggregate demand cannot collapse on its own. Some artificial means must raise demand it to an unsustainable or inefficient point from which a collapse is possible. The artificial means is provided by the government and Fed. Subsidies, tariffs, wars, taxes, and money printing are destructive to the productive process. None of these things can stop a recession, and they usually cause/worsen them.

Anonymous August 28, 2009 at 1:37 pm

Don was talking about fed intervention initially, so Mellon, Harding, and Coolidge have very little to do with it.

But even then, it was very different. Interest rates were HIGH which means we were not in a liquidity trap, which means no Keyensian in their right mind would have advocated substantial fiscal stimulus in that instance anyway.

You can’t cite Harding and Coolidge and claim you’ve refuted Keynes (I know you didn’t explicitly state this) if you’ve garbled Keynes to begin with.

Anonymous August 28, 2009 at 2:54 pm

“Depressions are caused by collapses in aggregate demand? I think you have been reading too much from a book by another Samuelson.”

Wasn’t my whole point that not all depressions are caused by collapses in aggregate demand?

Sam Grove August 28, 2009 at 3:13 pm

What causes a collapse in aggregate demand?

louh August 28, 2009 at 10:05 pm

How about aggreagte demand falling because aggregate supply has already fallen. Supply does create it’s own demand, it’s the basis of “says law” and the marginal utility theory. When the breaks are put on supply is the first to feel the crunch not demand. samgrove asks “what causes a collapse in aggregate demand?” a collapse in supply.

Gil August 28, 2009 at 4:56 am

Well said D. Keuhn. It is also forgotten that the 1987 stock market crash was worse than the 1929 one but there was no depression either.

Anonymous August 28, 2009 at 1:28 pm

jimpierq pointed me to this the other day, about confirmatory bias in macro: http://econlog.econlib.org/archives/2006/05/macroeconomics.html

I think it’s the same thing here. Not all recessions are created equal attempts to attribute them all to the exact same cause – “malinvestment”, or however you want to phrase it – is extremely misleading.

Sam Grove August 29, 2009 at 12:21 am

Not all recessions are created equal attempts to attribute them all to the exact same cause – “malinvestment”, or however you want to phrase it – is extremely misleading.Who made such a claim?

sandre August 27, 2009 at 9:14 pm

People talk as if 19th century is littered with panics and depressions, because we didn’t have central planners controlling the money supply.

Here are some facts –

between 1866 and 1898 ( 32 years ), year over year decline in GDP happened during 4 of those years – in 3 recessions.

A mild recession in 1875 when real GDP declined from 140.8 billion to 140.6 billion.

Another mild recession 10 years later in 1884 when GDP declined 2% from 233.5 billion to 229.7 billion

Then a major recession in 1890s that lasted 2 years – 1893-1894 when GDP declined a combined 10% over those 2 years.

During those 32 years GDP grew 284%

Let’s compare another post war period under central management of money supply – 1946 to 1978

There were 6 years of y-o-y declines in GDP.
1947, 1949, 1954, 1958, 1974, 1975

Cumulative Total GDP growth was 216%

It is totally ignoring the fact that monetary central planners managed to cause a great depression since they started planning.

Now, I will be the first one to admit that GDP stats are meaningless, but they mean a whole lot to Keynesians and to monetarists.

sandre August 27, 2009 at 9:37 pm

Here are some additional interesting facts -

The value of the dollar almost doubled between 1866 and 1898. In other words, What used to take $100 to buy in 1866, cost only $52 in 1898 ( based on CPI )

The US Dollar lost 70% of it’s value between 1946 and 1978. In other words, What used to cost $100 in 1946, cost more than $330 in 1978.

Anonymous August 28, 2009 at 2:46 am

Deflation?!?! Well, then, there surely was an economic calamity of unprecedented proportions, was there not? An unstoppable free-fall in production? 25% Unemployment? Reversed naturally by a massive stimulus package, no doubt.

Gil August 28, 2009 at 5:16 am

Yeah but you forget how much labour it takes to get those dollars. The dollars don’t buy as much but then again are easier to obtain. Hence the dollar losing x% of its value between so-and-so doesn’t automaticaly equate to people losing x% of their standard of living.

“Oh but what if someone wants to store dollars under a mattress for decades on end?”

Should anyone really care if someone wants to save a sandwich under a mattress for decades on end or if a blacksmith wants his skills to remain just as valuable decades later?

sandre August 28, 2009 at 5:46 am

Yeah right! Joe Sixpack is investing his savings to hedge against a 3% loss per year in his savings! Not! Value of money is an incentive to save – hence an incentive for capital formation.

Gil August 28, 2009 at 6:32 am

Didn’t you notice the rising incomes over the decades? People aren’t being forced to pay 2009 expenses with 1909 incomes. Besides if there’s deflation then wages will fall in line. Joe Sixpack may be like it when his $1000 dollars buy more but he’s finding it harder and harder to save another $1000 because each dollar is getting harder and harder to earn. It’s not deflation versus inflation – it’s rising productive stoopid.

Anonymous August 28, 2009 at 2:11 am

“but they mean a whole lot to Keynesians”

Only if they support their predetermined conclusions.

Anonymous August 27, 2009 at 9:34 pm

Bush takes over
1/21/2001 DOW 10,650

Bush leaves Obama takes over

1/21/2009 Dow 8200 Great job Bushy you only lost us 23% in just 8 years. THANKS A LOT!

Now

Dow 9580 UP 17% … man that must be ruff on the libertarian part of the brain that controls ideology.

How could this be??? Things were bad when Obama took over. His terrible plans should be making the disaster even worse…… what gives????

And from The Financial Times of London

Data point to US growth resuming
By Krishna Guha in Washington and Alan Rappeport in New York

Published: August 27 2009 20:15 | Last updated: August 27 2009 20:15

Data revisions underscored the likelihood of strong third quarter growth in the US on Thursday, as a hawkish Federal Reserve official raised the possibility of cutting short its planned purchases of mortgage-related securities.

IMPOSSIBLE… DOES NOT COMPUTE…. fuses blowing…..

It must be tuff watching your stock portfolios blowing back up in your ideological faces.

Grab onto your socks this could get worse… ideologically speaking…

http://www.nytimes.com/interactive/2008/10/14/opinion/20081014_OPCHART.html

sandre August 27, 2009 at 9:46 pm

If Bush was an a-hole ( and he was), then Obama lives in it.

For comparison – here is another neocon and his philosophy. He is a marxist-trotskyite.

http://en.wikipedia.org/wiki/Christopher_Hitchens

http://en.wikipedia.org/wiki/Neoconservatism

If you didn’t know, Neocons love democracy and spreading it all over the world. They are also Machiavellians – like all the socialists – end justifies means and all.

sandre August 27, 2009 at 9:54 pm

Here is the first paragraph about a Neocon…

Neoconservatism is a political philosophy that emerged in the United States of America, and which supports using American economic and military power to bring liberalism, democracy, and human rights to other countries.[1][2][3] In economics, unlike libertarians and traditional conservatives, neoconservatives are generally comfortable with a welfare state; and, while rhetorically supportive of free markets, they are willing to interfere for overriding social purposes.[4]

MWG August 27, 2009 at 11:16 pm

Wow muirdog, your economic analysis of the Bush years is really insightful and deep.

Isn’t it amazing that Bush spent all of his 8 years in office destroying the economy and it only took Obama a matter of months and a couple trillion $s to fix it. Maybe he should accelerate spending even further and by the end of his 8 years there won’t be any middle-class left because we’ll all be rich.

Anonymous August 28, 2009 at 6:14 am
sandre August 28, 2009 at 5:16 pm

Back in Feb 2009, muir used to pester us that we are not giving Obama 6 months time, or even 100 days. LOL. He is old, yet very naive. He buys all the progressive propaganda, without a second devoted to critical thinking.

Anonymous August 29, 2009 at 4:37 am

Why is he here? He is utterly resistant to learning. Does he think he’s persuasive?

sandre August 27, 2009 at 9:39 pm

Here is another update on the “success” of the cash for clunkers program.

http://www.calculatedriskblog.com/2009/08/report-car-sales-slump-11-below-june.html

Methinks August 27, 2009 at 9:56 pm

There you go tearing down the statists’ gods again, Don Boudreaux.

If it’s bad, it would have been worse without them. If it’s good, it’s all because of them. However, if you build a successful business, it’s all luck and the “system they built” and you owe them.

KO's Peace for NWO. August 27, 2009 at 11:06 pm

Tel Aviv, Friday, 28th August 2009.

The Puzzle of The Crash and The Sacrifice of Gilaad Shalit.

In this article I tell that The Crash will take place on Friday, 18nth September 2009 at 4:11 PM EST.

The reading of that article is of the uttermost importance for everyone.

It is even more important to the Islamic and Jewish people, the sons of Abraham.

It presents the causes and consequences of The Crash.

It prove that Ben ‘Systemic Risk’ Bernanke engineered deliberately the Great Recession and The Crash

For Eid ul-Fitr the Hamas will sacrifice Gilaad Shalit.

Tell the new to the world and free Gilad Shalit on 4th September 2009 at 5:58 Jerusalem Time and everything will be fine for example.

Some of you may be shocked by the videos and their wordings. Please don’t watch them.

The Puzzle of The Crash and The Sacrifice of Gilaad Shalit.

sandre August 28, 2009 at 12:02 am

Thanks for that heads up! I will keep this in mind :)

E. Barandiaran August 28, 2009 at 12:56 am

I challenge Robert Samuelson and all others that believe that a depression has been avoided thanks to Bernanke to provide detailed information about each of the specific actions that the Fed has taken since early 2008, including the timing and amounts of money disbursed by each program, the lists of beneficiaries of the disbursement, any repayment, any income or expenditure associated with each program, all regulatory and accounting changes for both the beneficiaries and other financial institutions as well as the Fed itself. Then maybe we can start to talk about the impact of the Fed’s intervention.

Anonymous August 28, 2009 at 2:51 am

Comparing the anomalous 1921 recession to the current one is another apples to kiwis comparison, although I do generally agree with you Don.

Wilmot August 28, 2009 at 7:06 am

I’ve thought of this a couple of times when hearing about the dangers of a spiraling depression like the 1930′s.

Absent some of the regulations that were present in the 1930′s which are not present today, it seems to me that a continuing depression would be impossible in a temporal setting. There are simply too many opportunities for arbitrage when prices fall for a depression to ever last.

I am wondering if some of the professionals here can comment on this idea.

Anonymous August 28, 2009 at 7:01 pm

Why even bother. Let’s just let the Socialists take over and abolish capitalism. It’s not as though Cafe Hayek is making headway with the people who really matter – college students at universities other then GMU.

louh August 28, 2009 at 8:19 pm

Here is an opportunity for revisionists to rewrite the history that never occured. It gives the Keynesians the perfect cover. They now can claim that their actions prevented a complete meltdown. From a logical perspective it’s much like the man who says by brushing his teeth today he prevented an asteroid from crashing into the earth. There is no logical way to disprove him. But that argument will fall apart over time when the unintended consequences of the Fed’s actions come home to roost.

Anonymous August 29, 2009 at 3:25 pm

I find this very interesting, because it’s my exact same reaction to the Austrian school’s reaction to the crisis. I would have thought that SURELY this would silence them. And yet they’re still trying to jam a square peg in a round hole and claim that this is definitive vindication of their position.Obviously my reaction to Austrians doesn’t solve anything – but I think it’s just important to keep that in mind. I don’t think anyone is a “revisionist” here – Keynesians or Austrians. They are both making a good faith effort at explaining what’s going on. Hopefully there will be resolution (I’m not holding my breath though), but I don’t think it’s right to assume that one side isn’t approaching an explanation of the crisis in good faith.

louh August 29, 2009 at 4:21 pm

I don’t recall the Austrian School taking credit for stopping the crisis. They certainly didn’t take credit for the massive fiscal response. The Keynesians own this , and over time we will see the damage. At that point they can point out how their policies were hamstrung by the conservatives. Krugman is already laying that foundation.

Anonymous August 29, 2009 at 4:05 am

It is always nice to follow a discussion and try to figure out what is missing from the arguments of the participants. First I see there is a tendency to deduce economic insights just from statistical observations. That chicken or egg argument about the decline in aggregate demand totally missed the real world possibility that the spike in gasoline prices sent millions of people from just scraping by to falling behind in their mortgage and the downward spiral that ensued.

Second, there is the matter of “government intervention” in the economy, a term that is toss about as if it has the same meaning across time. Beyond that, it seems to refer exclusively to interventions like monetary policy or social programs. But until recently, governments intervened early and often with some thoroughly reprehensible policies designed to thwart economic aspirations, among other things. Yet, people still try to compare stats across what are really completely different societies.

Sam Grove August 29, 2009 at 6:12 am

aggregate demand totally missed the real world possibility that the spike in gasoline prices sent millions of people from just scraping by to falling behind in their mortgage and the downward spiral that ensued.

I believe I brought that up in this forum some time ago.

We might note that a goodly part of the reason millions of people have been just scraping by is the cost of government and empire, otherwise, the spike in gasoline prices would not have been such a big deal.

Anonymous August 28, 2009 at 3:27 pm

Didn’t you ask me this exact same thing a couple weeks ago?

Lots of things potentially – one of which being the failure of malinvestments which were encouraged by excessively expansive monetary policy.

sandre August 28, 2009 at 3:51 pm

So recessions are caused by malinvestments, not by a fall of aggregate demand. You are putting the cart before the horse.

Sam Grove August 29, 2009 at 12:18 am

What Sandre said.When speaking of causes, we must go to the root.The root in this case, as you stated, was “excessively” expansive monetary policy.Thus a collapse in aggregate demand is not a cause, but rather, a result.The collapse in aggregate demand is due to the revelation of malinvestment.What people had thought was an accumulation of wealth, was actually an accumulation of malinvestment.

Why do I harp on this?

Because the statement in question is not informative when we seek appropriate policies to avoid a recurrence.

If it is held that the recession was caused by a collapse in aggregate demand, then the superficial solution is to figure out how to prevent such a collapse. Politicians usually go for the superficial solution because it is easy to explain.

But it is not a real solution.

Anonymous August 28, 2009 at 4:11 pm

I said “one of which being”…

I’m not one that thinks this whole crisis was attributable to Greenspan’s shenanigans. I can accept that Greenspan had something to do with it without assuming he was the only source. I don’t know how anyone could justify such a simplistic perspective.

No, nobody ever claimed that declines in aggregate demand happen in a vacuum – that they are some kind of “first mover”. I suppose in some very specific instances they may be (ie – like Minsky-esque collapse of demand), but nobody is claiming it emerges out of thin air. The point is, when there is a collapse of demand at the same time that you’re in a liquidity trap, the circumstances are very very different from if you have rampant inflation and the Fed (wisely) decides to hike interest rates (as in 1921 and 1981). It’s apples and oranges. I never understood why Keynes called his book the “general theory”. It’s actually a very specific theory – it’s a theory pertaining to apples. We’re bickering over oranges.

sandre August 28, 2009 at 4:53 pm

“No, nobody ever claimed that declines in aggregate demand happen in a vacuum – that they are some kind of “first mover”.”

“It has zero to do with a depression caused by a collapse of aggregate demand.

You said both those things.

sandre August 28, 2009 at 4:59 pm

Didn’t you notice the rising incomes over the decades?

Yes, I did. Tell that to a person on retirement earning fixed income.

Progressives are the biggest defenders of inflation, and I’m sure there are others too. Yet, inflation is the most regressive of all taxation. New money always goes to the upper creamy layer of the society – the bankers and the investors who borrow from them. It reaches the bottom layers the last.

Joe Sixpack may be like it when his $1000 dollars buy more but he’s finding it harder and harder to save another $1000 because each dollar is getting harder and harder to earn.

Has there ever been a long term and irreversible trend where Joe Sixpack found it harder and harder to earn the previous years income? I mean under a non-inflationary monetary system.

Let’s just say he did, with the fact that his $1000 goes further and further year after year, under such a non-inflationary system, is he really finding harder to earn the same $1000 buying power from the previous year? Yes, it’s productivity stupid!

Anonymous August 28, 2009 at 9:31 pm

Right….

What’s your point? Just because a recession is caused by a fall in demand doesn’t mean that the fall in demand is therefore causeless. You’re confusing me sandre – what are you getting at?

sandre August 28, 2009 at 10:57 pm

#Sam Grove…
What causes a collapse in aggregate demand?
Flag
Like Reply Reply
#
danielkuehn [Moderator] 7 hours ago in reply to samgrove
Didn’t you ask me this exact same thing a couple weeks ago?

Lots of things potentially – one of which being the failure of malinvestments which were encouraged by excessively expansive monetary policy.

Everybody misunderstands you.

Gil August 29, 2009 at 3:07 am

* Do tell how deflation benefits those who have to pay a fixed income or someone who’s loan is getting harder and harder to pay.

* Wasn’t the Cross of Gold speech to with prolonged deflation and idle people because they could get any credit because gold was felt too valuable to lend?

* Yes, it’s productivity stoopid! The wealth of the 1800s came from productivity gains not deflation and the wealth of the 1900s came from productivity gains not inflation. Deflation without increased productivity is meaningless.

Anonymous August 29, 2009 at 5:09 am

Nice post, Sam.

Name August 29, 2009 at 9:06 am

Ditto.

Anonymous August 29, 2009 at 12:26 pm

But the problem is you only trace it to malinvestment which is absurd. I mentioned that cause to make the point that I’m not rejecting the central Austrian argument – I never have. I’m simply not depending uniquely on it.

And even if I were to only trace it to malinvestments, that doesn’t mean that once depression conditions have taken hold fixing those initial conditions will solve it. Your perspective ignores non-linear interactions that make a crisis very quickly move beyond an exercise in jettisoning malinvestments. What about Fisher’s debt-deflation approach, or Keynes’s analagous wage-price spiral? These are all reasons to think that even if it were only caused by malinvestments (which you really provide no reason to be confident that it is), simply correcting malinvestments won’t always stop a crisis (sometimes it will – 1921, 1981, etc. when rates were raised BEFORE a collapse in aggregate demand occured).

Doesn’t it bother you that you are (1.) relying on a single explanation for recession, and (2.) making the implicit assumption without any justification that addressing that single explanation will solve everything? EVERYONE believed that, or something like that 100 years ago. Fisher and Keynes and guys like that spent their careers figuring out why in practice it didn’t work. They’re not rejecting your central causal argument. They’re pointing out that clearly there is more to it than that and there are mechanisms that operate that make things get out of hand once a prolonged slump takes hold.

sandre August 29, 2009 at 6:20 am

Why would some one on fixed income find it harder to pay a loan back?

I ask the question again….“Has there ever been a long term and irreversible trend where Joe Sixpack found it harder and harder to earn the previous years income? I mean under a non-inflationary monetary system.”

FDR campaigned against Hoover’s profligate spending, in the 1932 election – what’s your point? Politicians give a lot of speeches, and they are just trying to appease some group or the other. Cross of gold speech was not about gold, but the repeal of Sherman Silver Act. Jennings Bryan received the nomination of the Silver Republican party in 1896, in addition to the populist party.

Deflation without increased productivity is meaningless.

you are just slaying strawmen. Deflation does not equal decreasing productivity, as often repeated by monetarist and keynesian economists.

Now, to give you some pointless stats, Compounded annual growth rate of real GDP from 1865 to 1880 was 4.05% – one of the best ever in the U.S history. Why is that important? It was a period of real contraction in the supply of money – after printing up all the greenbacks during the civil war, the Federal government decided to go back to prewar parity with Gold, yet productivity gained. Still, there was no long depression.

All the tinkering with money supply, discretionary powers for a small clique of elites, bailouts, inflation etc. has not improved the economic situation one bit, if anything it has helped deteriorate economic performance.

Gil August 29, 2009 at 11:50 am

* *face palm!* Savers like deflation, borrowers like inflation; savers hate inflation, borrowers hate deflation. Besides how does someone get a fixed income in the free market? Those on fixed incomes are generally those being supported by taxpayers (e.g. old age pensioners).

* The Cross of Gold wasn’t about gold!?!? Bryan and friends wanted silver to circulate as currency alongside gold. Goldbugs believed silver to be inflationary and gold to be stable. Gresham’s Law would have sided with the goldbugs since silver is less valuable than gold (weight for weight).

http://en.wikipedia.org/wiki/Cross_of_Gold_speech

* Nope. If there decreasing amounts of money chasing the same amount of goods & services then incomes will fall in line with expenses. Why is that so hard to understand? Wealth comes from productivity gains not how much currency happens to be circulation. If tinkering and inflation does squat then people have to face the fact that there’s no increase in productivity and maybe even decreasing productivity.

Anonymous August 29, 2009 at 12:29 pm

I don’t know – but insofar as anyone did it’s misleading. And insofar as anyone rejects other explanations it’s misleading.

This is one of those “if the shoe fits” situations, Sam :)

Anonymous August 29, 2009 at 2:49 pm

“everyone misunderstands you”

Huh? Look – methinks isn’t as clever as you might think. He asked a question that he’s asked at least a couple times before. And I answered it. What’s the concern?

Sam Grove August 29, 2009 at 3:32 pm

I do not assume that there is a single explanation for recession. You seem to be under the assumption that because I lean Austrian I therefore ascribe to such a theory. I do not see the Austrian school has holding to such a theory either.I have mentioned other causes before, including natural factors. So please try to remember that I do not hold that there is only one cause for recession.I was going from your statement as to the cause for a specific recession, the current situation.Now if you think there is some root other than “excessively” expansive monetary policy, this is you opportunity to share the revelation.Greed, animal spirits, etc., are a constant in human society. To “blame” these factors for unique events isn’t very helpful.Humans react, and in aggregate, they tend to react fairly predictably.Cheap money plus opportunity for profit leads to excitement.

Sam Grove August 29, 2009 at 3:38 pm

I think the main theme around here is that a credit monopoly, on balance, does more harm than good.

This is not to suggest that the financial seas will be flat without such an agency.
Life is unpredictable.

sandre August 29, 2009 at 4:14 pm

It is very easy to come under the impression that Keynesian see only one false reason for all reasons – fall in aggregate demand.

Anonymous August 29, 2009 at 3:48 pm

You are right to criticize me on that – see my similar response to you below (where I don’t say you specifically do it). I make it clear that it’s an “if the shoe fits…” assessment, or really an “insofar as the shoe fits…” assessment.

You do, however say this: “The collapse in aggregate demand is due to the revelation of malinvestment. What people had thought was an accumulation of wealth, was actually an accumulation of malinvestment.” and later if you think there are other causes, you aren’t very forthcoming.

But remember my basic point – if you can clean out malinvestments early, that’s great. But there are good reasons to believe non-linearities take hold after the collapse in aggregate demand. Fixing that original problem isn’t going to address the non-linear progression of decline.

As for “other sources” – I would cite animal spirits (which are always with us), but in a much tighter, cylcical way. Think about Minsky’s models with cyclical animal spirits because of miscalculations in human perception of the return to investment. This isn’t a “black box” argument – it’s a solid explanation of why, even in the absence of a central bank, you’d have business cycles due to animal spirits. The Minsky model is fundamentally a perception-based model. But you could also cite the accelerator-oscillator model as an example of how the dependence of real investment on prior demand can result in cyclical behavior that is completely independent of a central bank.

But putting all this aside, even if it were ONLY central banks and malinvestment (which I don’t believe and you claim not to believe either) – I don’t see how one would get from “malinvestments caused it” to “eliminating malinvestments will fix it”. It’s a leap that isn’t justified.

Anonymous August 29, 2009 at 4:06 pm

I want to make clear I fundamentally agree with you. I do of course think talking in terms of aggregate demand is appropriate. But talking in those terms without critically thinking about underlying causes is wrong – I agree with you on that.

What I’d impress upon you is that a collapse in aggregate demand can cause a collapse in aggregate demand – it can feed on itself.

Anonymous August 30, 2009 at 9:52 pm

“Greed, animal spirits, etc., are a constant in human society. To “blame” these factors for unique events isn’t very helpful.”

Exactly. It is a NON-explanation. And how Keynes could be taken seriously after spewing it is unfathomable.

Anonymous August 29, 2009 at 4:17 pm

It is if you don’t read seven decades of Keynesian literature.

Come on – this is a cheap shot. Even in the General Theory a fall in demand is an effect, not a cause. Unless you’ve read a different General Theory from me.

Anonymous August 29, 2009 at 4:24 pm

Yes, I agree. It was an unfair generalization that I presented above. I obviously still don’t agree that it does more harm than good – but the sensationalization of the Austrian position doesn’t help. It IS an oversimplified position, but not a utopian position.

sandre August 29, 2009 at 5:38 pm

“cheap shot”
Not to any larger extent than your insinuation that Austrians have only one explanation for all recession.

Sam Grove August 29, 2009 at 6:06 pm

What I’d impress upon you is that a collapse in aggregate demand can cause a collapse in aggregate demand – it can feed on itself.A panic response and stampeding.However these tend to be short lived, and people get back to work once they accept their loss.My interpretation of the Austrian analysis is that centralized agencies, such as the FED and the gov’t, when they attempt to manage economic activity, act as harmonizers on the ups and downs of the market, turning random irregularities into large singularities.I think extensive analysis will reveal that certain gov’t policies regarding housing, coupled with credit expansion by the FED, led many into unsustainable investment in real estate and construction.There have always, and will always be forclosures, bad investments, business failures, etc., but by inducing certain profit signals in the market, these random events were induced into a large scale event by the very agencies now charged with rescuing us from same.Additionally, the cost of government programs, being borne, as always, by those who labor to create value, has left many more sensitive to trigger events, such as the jump in fuel prices. In essence, the cost of government, not to mention emotion mongering by various entities, has increased the reactive nature of the “animal spirits”.BTW, it seems to me that Keynesian economics is more about the mechanics of economic cycles than about causes. I get this in no small part from your elucidation of of said causes.

Of course, I say all this as someone who knows little about economics.

Sam Grove August 29, 2009 at 6:20 pm

But putting all this aside, even if it were ONLY central banks and malinvestment (which I don’t believe and you claim not to believe either) – I don’t see how one would get from “malinvestments caused it” to “eliminating malinvestments will fix it”. It’s a leap that isn’t justified.

That’s an erroneous way of looking at it. I don’t suggest that “malinvestments” caused it. Malinvestments on such a large scale suggest a prior factor leading to such a situation.

Malinvestments are an unavoidable part of the functioning of the market, but it is best if they are dispersed and small scale. Bad investments induce caution and enable us to distinguish better investment.

Sam Grove August 29, 2009 at 8:55 pm

The Austrian analysis is not so easily explained, those who wish to comprehend the subtle aspects of the analysis must actually do some of the work.

But for the lay public, simplification is usually the order of the day.

Witness the public explanations of the Keynesian analysis.
My take of such explanations is that root causes are not at issue so much as the mechanics of economic functioning so that management seems feasible.

Anonymous August 30, 2009 at 4:54 pm

You might want to review – I took that back.
I don’t know of any other Austrian explanation besides exogenous shocks that everyone can agree on – but I won’t presume there aren’t others.

Can you tell me about/cite others?

Regulation! Right – that’s one. I’m sure there are others – do you have thoughts on that?

What was truly amazing about your statement is that I’ve listed about four reasons, including the standard Austrian explanation. So for you to say “only one” reason is absurd on it’s face and makes it look like you’re not really taking part in the discussion.

Anonymous August 30, 2009 at 4:57 pm

The advantage of a Keynesian perspective is that it recognizes sources of recessions in both government interference and natural market instabilities. It’s not as restrictive in it’s understanding as the Austrian school- even if Austrians are broader than the first impression they give.

Anonymous August 30, 2009 at 7:11 pm

RE: “That’s an erroneous way of looking at it. I don’t suggest that “malinvestments” caused it.”

I know you didn’t. That’s exactly why I wrote “I don’t see how one would get from…”. I wrote it specifically that way precisely because you were so sensitive to what I said you said before. Once again, this is an “if the shoe fits” moment, Sam.

It is worth my bringing up, though, because that’s often all you hear – monetary inflation and regulation leading to bad investments. If any other explanation is prominently talked about I’d love for someone to point me to it. I’m not saying you said this, but insofar as the shoe fits anybody….

Anonymous August 30, 2009 at 7:13 pm

Whats the difference between the “mechanics of economic cycles” and “causes”?

Anonymous August 30, 2009 at 9:09 pm

I have years of graduate level statistical theory behind me, so I was hoping my statement was not lost on you.

A sample size can be defined as broadly as you want, as simply a number of uncontrolled haphazard experiments even. But properly used, it is a number included within **A** properly structured controlled experiment, where randomization and/or other appropriate statistical means are used to control for all possible confounders. When you cannot control for those things, such has when comparing economic outcomes in different times and different places, there is no difference between multiple n=1 “experiments” and a poorly controlled n>1 “experiment”.

The effect of studies that do not employ those controls, such as all historical economic comparisons, is that the results are always STRONGLY STRONGLY STRONGLY suspect. To the point where an experimental scientist, in one of the hard sciences, would by their standards completely disregard their validity.

And that is why economical explanations based on empirical facts can always lead to diametrically opposed conclusions. The debate on causes of the Great Depression is just one outstanding example.

And that is why–much more so than in controlled experiments–deductive logic MUST be a major component to any economics explanation.

And that is why economics is dominated by ideological and philosophical thought to a far greater extent than, e.g., the relative effectiveness of one pharmaceutical compared to another.

Anonymous August 31, 2009 at 9:58 am

I completely got the point you were trying to make, and the hestitation you had about non-experimental empirical work. But you have to admit that while caution about using non-experimental methods is completely valid, your explanation of sample size bears no resemblance to anything taught in statistics – graduate or otherwise. If your point is caution, the point is well taken.

I think it’s also important to remember how many “hard scientists” don’t rely on experimental empirical work either. Astronomers, many biologists, meteorologists, many geologists. The idea that valid science must either be experimental or deductive doesn’t come from any statistical class or from any scientist – I have a feeling it’s coming from the Austrian school.

As for philosophy/ideology in economics… I really don’t see this for the most part. The conclusions of most mainstream economics are shared by a huge swath of ideological and philosophical perspectives. The schools of thought that are more ideological – Marxian, Austrian, etc. – are far more marginal to the discipline. To the extent that it does come in, though, I think ideology in economics is derived more from the fact that human beings and human society is the subject of study, and that that has consequences – and much less to do with the empirical methods used.

Anonymous August 31, 2009 at 10:02 am

I don’t know about “greed”, but the whole point is so-called animal spirits are not constant. If they were it would obviously be meaningless. Pick up Akerloff and Schiller’s new book, or some Minsky. If you think animal spirits are constant you’re missing the whole point of the argument

Anonymous September 1, 2009 at 10:20 pm

“your explanation of sample size bears no resemblance to anything taught in statistics – graduate or otherwise.”

Would make things simpler if you were right and sample size could simply be defined as “the number of events I wish to compare”. I can think of some rather thick textbooks that could be pared down to 1 page.

But just because people do it, does not mean that there isn’t implicit knowledge (by the knowledgeable, anyway) of what it really means. You can take a case series, and count the number of cases as your sample size (which essentially describes economic studies), but nobody with even a passing knowledge of statistics would take that to mean the same as a sample size in a prospective randomized double blind controlled trial. Caution in the former is all well and good, and creates interesting coffee-house discussions, but it can NEVER (and should never) be enough to persuade a reasonable skeptic.

“The idea that valid science must either be experimental or deductive doesn’t come from any statistical class or from any scientist – I have a feeling it’s coming from the Austrian school.”

I have no idea what you are talking about. It is false statement that I’m sure anyone but your straw man would attest to. It doesn’t come from me, and it certainly doesn’t come from the Austrian school. I refer you to Chapter 1 of _Human Action_.

“As for philosophy/ideology in economics… I really don’t see this for the most part. The conclusions of most mainstream economics are shared by a huge swath of ideological and philosophical perspectives”

Interesting. So the more popular an idea, the less ideological. I have to disagree with you there. Mainstream economics conclusions, like any economic conclusions, are heavily dependent upon an a priori foundations. You couldn’t draw consistent conclusions from empirical economic evidence otherwise. Ergo the old saying, “Show me 7 different economists and I’ll show you 8 different opinions.”

Anonymous September 1, 2009 at 10:27 pm

The whole point is to avoid a fundamental understanding of economics which would topple his whole thesis and reputation.

Anonymous September 2, 2009 at 9:40 am

“It doesn’t come from me, and it certainly doesn’t come from the Austrian school. I refer you to Chapter 1 of _Human Action_.”

:-D

“So the more popular an idea, the less ideological. I have to disagree with you there. ”

No – but the more people of different ideologies agree on something, the less it must have to do with their ideologies.

“Mainstream economics conclusions, like any economic conclusions, are heavily dependent upon an a priori foundations.”

Certainly – but what to foundational assumptions have to do with ideology? They can I suppose… if your assumption is “the proletariat is being oppressed by the capitalist” – but that’s not the kind of assumption that economists rely on.

Anonymous September 2, 2009 at 3:21 pm

“:-D”

What does that mean?

“the more people of different ideologies agree on something, the less it must have to do with their ideologies”

Except for the ideology behind that which they are agreeing on.

“what to foundational assumptions have to do with ideology”

Absolutely everything. Always.

Anonymous September 2, 2009 at 3:33 pm

“What does that mean?”

It’s a smiley face… I found that funny. I said the only people that have that perspective on science that I can think of are in the Austrian school, you said that’s a false statement and a straw man, and proceeded to prove your point by citing one of the foundational documents of the Austrian school. At least I thought you were joking – which is why I smiled. Were you serious?!?!?!?

RE: “Except for the ideology behind that which they are agreeing on.”

Oh right… they’re all socialists. I forgot.

Anonymous September 2, 2009 at 4:47 pm

“to prove your point by citing one of the foundational documents of the Austrian school.”

Then you are laughing at your own ignorance. I referenced chapter 1 for you in earnest so that you could, with very little effort, read it, and then realize that your characterization of the Austrian school is false. I can’t cure your ignorance, I can only help direct you. The empirical/deductive false dichotomy that you mentioned is a well known philosophical issue that predates both your straw man and the Austrian school. But the Austrian school most certainly did not succumb to it.

“Oh right… they’re all socialists. I forgot.”

DK, it is an obvious fallacy to confuse people with ideas, which is what you were doing with your absurd platitude “the more people of different ideologies agree on something, the less it must have to do with their ideologies”. What matters with an idea is its own pedigree, not that of other ideas, and not who or how many espouse it.

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