Real Business Cycle Mindset in Action. U.S. stocks declined, erasing earlier gains after benchmark indexes approached five-year highs, amid concern that global stimulus measures won’t be enough to boost economic growth.
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“We are unlikely to see much benefit to growth or to employment from further asset purchases”
Philadelphia Fed President Charles Plosser, 9/25/2012
That Was Now, This Was Then:
“with credit cheap and redundant we do not believe that business recovery will be accelerated by making credit cheaper and more redundant...We believe that the volume of credit forcibly fed to the market up to this time has had no considerable good effect, certainly no discernible effect in the last few months...We also believe that every time we inject further credit without appreciable effort, we diminish the probable advantage of feeding more to the market at an opportune moment which may come.”
John U. Calkins of San Francisco Fed, June and July, 1930 (F&S, p. 128)
Lessons learned: Money Matters
Policy errors Great Contraction Great Depression
…small events at times have large consequences. A liquidity crisis in a fractional reserve banking system is precisely the kind of event that can trigger – and often has triggered – a chain reaction. And economic collapse often has the character of a cumulative process. Let it go beyond a certain point, and it will tend for a time to gain strength from its own development as its effects spread and return to intensify the process of collapse. Because no great strength would be required to hold back the rock that starts a landslide, it does not follow that the landslide will not be of major proportions.
1/[c + θ (1 – c)]
c = Currency/Money
θ = Reserves/Deposits
Death of Benj. Strong, 10/28
Shocks Changes in Ms
Stock Market Crash, 10/29
1stBanking Crisis, 10/30
2ndBanking Crisis, 3/31
Britain off Gold, 9/31
Large-Scale Open Market Purchases, 4/32
Banking Panic of 1933
Hoover: The Fed was a weak reed for the nation to rely on in a time of trouble.
[my] directors were “notinclined to countenance much interference with economic trends through artificial methods to compose situations that in themselves grow out of events recognized at the time as being fallacious”—the stock market speculation of 1928–29. Resented New York’s failure to carry the day in 1929 and the felt that existing difficulties were the proper punishment for the System’s past misdeeds in not checking the bull market: “If a physician either neglects a patient, or even though he does all he can for the patient within the limits of his professional skill according to his best judgment, and the patient dies, it is conceded to be quite impossible to bring the patient back to life through the use of artificial respiration or injections of adrenalin.”
Lynn P. Talley of the Dallas Fed, 7/15/30 (F&S, p.128)
And from Philadelphia:
...”the fruitlessness and unwisdom of attempting to depress still further the abnormally low interest rates now prevailing...”
The Philadelphia Bank objects to “the present abnormally low rates for money” as an interference “with the operation of the natural law of supply and demand in the money market...”
George W. Norris of the Philadelphia Fed 7/8/30 and 9/25/30 (F&S, p. 129)
Mundell Effect: Wait to spend
High real interest rates Wait to invest
Increased burden of debt Debt deflation vicious circle
BIG SHOCK (The Great War) Pre-War Relations Upset
[ Docile Labor Militant Labor] ???
Classical Gold Standard Inappropriate
Gold Standard Prescription: deflation, contraction for every problem
Access to credit not the problem