Did Bernanke Prevent Another Great Depression?

| Peter Boettke |

George Selgin provides the answer.

Comments

[Mario Rizzo]

I really don't know how politically we can convince people that Bernanke and the Fed/Treasury did not save the day. If the apparent recovery continues, we will have our hands full. The only chance then is if people think the price paid is too great in inflation, high interest rates, fiscal chaos, etc.

I remember that even one famous econometrician who should know better talked of the PRINCIPLE of post hoc ergo propter hoc and not the fallacy.

[Peter Bopettke]

Mario,

Let me just point out, in the self-defensive nature of my open letter, that I pointed out the problem of the fallacy of post hoc ergo propter hoc and the counter-factual at the beginning of this episode.

I think all we can do is keep making the point. It takes varied reiterations to force alien concepts upon reluctant minds!

Pete

[Nikolaj]

This Selgin's article is little confusing.

Slegin 1:
"Even a severe downturn can be followed by rapid recovery without aggressive central bank intervention. In the 1921 recession, wholesale prices, industrial production, and manufacturing employment all fell by 30 percent or more within a year. Yet by early 1922, the US economy had recovered fully from its mid-1921 low. What's more, it did so with no help from the Fed, which was determined to let the recession take its course, so as to hasten the restoration of the prewar gold standard.", but

Selgin 2:
"...Yet the Fed resisted a much-needed loosening of monetary policy until early October. Then, although it finally took steps to aggressively expand bank reserve credits, it undermined the potential stimulus effect of doing so by starting a new policy of paying interest on bank reserves. In short, the Fed behaved much as it had back in 1936-37 when, fearing inflation (of all things), it decided to double bank reserve requirements, plunging the US back into the Great Depression from which it was struggling to emerge.".

Now, either easing or tightening is appropriate monetary policy during recession. There cannot be both at the same time! It is not obvious from Selgin's article where Bernanke exactly failed. If "even a severe downturn can be followed by rapid recovery without aggressive central bank intervention" than how at the same time Bernanke is to be blamed for insufficient interventionism?

[George Selgin]

Nik: I am breaking my resolve not to reply to you, though I have a good idea what good it will do me. In any event I never said that tightening was helpful, in the 1920s or at any other time; it may well be that the 20-21 crisis would not have happened at all, or would have been far less severe, had there been no collapse of spending.

Moreover it is notorious that prices and wages are a lot "stickier" now than they once were (Chris Hanes has documented the fact w.r.t. the 19th century). Consequently there's good reason to believe that recovery from a collapse of spending from expected levels of any given extent would take far longer now, in the absence of policy actions to reverse the collapse, than was the case in the decades prior to the Great Depression.

I know that Rothbard and Co. have taught you to think as if prices could easily adjust downward at any time. Yet it was Rothbard himself who assailed Hoover and FDR for introducing policies that severely interfered with such adjustment. Well, those rigidities didn't entirely vanish with the ending of the New Deal, or with FDR's death. Some remained in place, thanks to the survival of minimum wage laws, the Wagner Act, and plain-ol' inflation expectations, among other things. Pretending that they aren't there--that nothing has changed since Harding's time--is just plain bad macroeconomics.

[Lee Kelly]

George Selgin said: "I know that Rothbard and Co. have taught you to think as if prices could easily adjust downward at any time."

Many Austrians seem to assume that prices are "sticky" during the boom and instantly correcting during the bust. That's weird.

If central bank sponsored expansion of the money supply were matched by a fall in the demand for money, then the boom would be nipped in the bud by quickly rising prices.

[George Selgin]

Lee, you are quite right about the weirdness of some Austrian's implicit appeal to what might be called "asymmetric price stickiness." But I can't understand your last point. If, as the money supply expands, demand for real balances declines, that just means that the extent of monetary excess (in the presence of sticky prices) and associated relative price distortions will be that much greater.

Monetary expansion is less harmful--indeed (in my book) desirable--not when it goes along with shrinking money demand, but when it accommodates money demand that's groing just as rapidly.

[Pope Buzungulus III (The Purple Pope)]

Hey George, were you able to get home and check whether Nikolaj had previously misquoted you from last time? I don't recall if you did or not, and you said you would.

[George Selgin]

Pope,

Nikolaj didn't misquote me, but I think he read too much into my quote. In TFB I certainly took the view that Mises opposed fiduciary media, but even then I understood that while he believed the free banking would limit its extent, I also believed, based on many statements in TMC and elsewhere,that he didn't literally expect free banking to wipe such media out altogether. The quoted passage lends itself to Nik's interpretation--but I am quite certain this was always my view.

Today I'm much more cognizant of the inconsistency of Mises various statements about fiduciary media--some in favor, some opposed.

[Pope Buzungulus III (The Purple Pope)]

Well George, we can agree on that: Mises was definitely inconsistent here (also in some of his arguments in the soc calc debate). (So yes, Steve, Rothbardians should be more circumspect in adopting the Misesian mantle [and proudly embrace a Rothbardian mantle].)

[Lee Kelly]

George,

I can't understand my last point, either. It doesn't make a lick of sense. I don't know what I was thinking :) I don't know what I meant to say last night, but usually -- and right now -- I agree with the comments in your response.

[Nikolaj]

George,

"Nikolaj didn't misquote me, but I think he read too much into my quote".

It's nice for readers of the blog to know, even with couple of weeks of delay, that I was not "dishonest" as you said, and did not deliberately misquoting you, as they also were suggested to believe. I didn't want to ask you whether you checked the quotation, because I supposed your publicly made accusation against me would bind you to come back and report about your findings and eventually apologize if quotation turns out to be correct.

Second, I did not read anything into your quote, I just cited what you said. Now, you could argue that the statement was not the whole story (as you know do) and that your opinion was more complex and nuanced than that. But problem was that you explicitly asserted here on the blog "I never told Mises believed free banking would automatically lead to 100 reserve", which was utterly incorrect.

Instead of really odious personal insults ("fool", "dishonest", "liar"), you should simply do what you did today - admit the citation was correct, but did not necessarily reflect your today's point of view.

But, even with that clarification in mind, your position is still close to what I ascribed to you originally. You would not say now that Mises believed that free banking was good because it would eliminate all FM automatically, but because it would severely limit its emission, which eventually boils down to the idea that FM is bad and should be either eliminated or severely limited. And this is pretty different of what Steve ascribes to Mises in an effort to portray him as consistent with conventional fractional reserve free banking view.

[George Selgin]

Nik, no matter how hard you try, you can't get me to say other than what I've already said umpteen times, including in my original post on the Mises-FRB thread, to wit: that Mises was simply not consistent on the subject. Sometimes he was OK with FRB; sometimes not. And there's an end on it.

As for my claim that you were (perhaps) dishonest, it did not refer to your misquoting me w.r.t. the passage on Mises and Cernuschi. It referred to your misrepresenting my defense of the quote, in which I said that I had undertood Mises (and Cernuischi himself) to have resorted to hyberbole in suggesting that allowing freedom in banking would lead to suppression of fiduciary media. In your response to that (polite) explication of my position, you represented me as suggesting that I understood my own quote as being an instance of hyperbole--something I never said, which you (quite impolitely) characterized as "ridiculous" (or something to that effect.

And now, true to form, you once again misrepresent what I have said, which is why I don't want to deal with you any longer.

[Nikolaj]

George,

I don't expect dissent behavior from you (for example apologizing for ugly insults), so I am not particularly surprised by your newest exhibitions either.

But, apart from this aspect, main cognitive issue here is that you cannot call Mises fractional reserve free banker, however loosely and self-serving you interpret your own assessments of him (you said something clearly, but you didn't actually mean that etc). Whether Mises thought free banking would "automatically lead" to total suppression of FM (as you said in your book) or just that it would severely limit its amount (as you now assert), it is obvious that Mises identified good monetary system with decreasing amount of FM, and that he supported free banking only because in his view it tended to suppress, to higher or lower degree, further emission of FM. On the other hand, fractional reserve banking position is quite different - it assumes that free banking is a superior system compared with central banking because it provides better intertemporal management of fiduciary media, not necessarily decrease of its amount. So, debate whether Mises thought free banking would eliminate or just significantly decrease FM is a red herring. Whatever of that two possibilities is correct, he is equally opposed to fractional reserve system in both cases, on the same grounds.

[Barkley Rosser]

I would note that the NBER has officially declared the recession to have started in Dec. 2007. If it turns out that they end up agreeing with Bernanke and, let us say, August was the first post-recession month, that would be 20 months, not fewer than 17. I would also note that most of the 19th century ones were longer than the post-WWII ones, back in the days of semi-free banking and more flexible prices.

I think Bernanke did many things that were unwise, and many are pointed out here. However, I think the claim that what he did prolonged the recession is certainly not certain, and would be hard to prove.

People on this blog really ought to stop making a big deal about the 1920-21 recession in contrast with either the GD or the current mess. There was no role of the financial system collapse in that event, and it is clear that problems in the financial system really make it much harder to get out of the messes, even if one wants to argue that it was bad policy that made a mess of the financial system in the first place.

Finally, although of course I cannot prove this, I do think Bernanke did as advertised, with the crucial moment being a year ago at this time, particularly around Sept. 18. It was not talking Paulson into TARP (pretty much of a farce), but his dramatic taking on of all kinds of stuff, including from the ECB, onto the Fed balance sheet, a totally unprecedented act. Indeed, George, it is not obvious to me that you disapprove of those actions, even if perhaps you disagree that they saved us from (at least the threat of) a new Great Depression.