Scott Sumner on the Great Depression
By Arnold Kling
The talk is here. Very worthwhile.
Near the end he makes the point that when there is a large collapse there is a tendency to blame it on huge imbalances prior to the crash. The “huge imbalances” view is what dominates Overdose, a new movie by Johan Norberg.
Something like Overdose has great psychological appeal. It’s a Noah-and-the-flood story, in which mass punishment is inflicted because of those who sin. Great drama there. The Left tells the story with Wall Street as the sinners; Norberg tells the story with the Fed and politicians as the main sinners.
Sumner’s story is one in which the government is inadvertently clumsy. In the 1930’s, monetary authorities thought that it would be safe to hold gold, and they inadvertently lowered the money supply. Then Presidents Hoover and Roosevelt thought that if wages fell that would reduce purchasing power and worsen the recession, so they took steps to maintain wages–which worsened the recession.
For 2008, Sumner’s story is that the Fed, thinking that interest rates were low and knowing that the monetary base had shot up for reasons having to do with bailouts, decided that it was running a loose monetary policy. It decided to pay interest on reserves, a contractionary policy.
I still think there is more to the current problem than just a monetary contraction. The Minsky-Jones economy, Recalculation–I won’t repeat myself here. But Sumner and I would agree that we are not in a liquidity trap, which means that neither of us would see the fiscal stimulus enacted last year as justified.