In today's New York Times, Professor Mankiw writes "... it’s hard to avoid seeing parallels (with the Great Depression) to the current situation." Conspicuously absent from the article are specifics about the parallels he sees (not to mention the lack of a conceptual framework -- supply and demand maybe?! -- to understand what fundamentals are even worthy of comparison, but that's another topic).
He points out that consumers are scared. I agree. Anything else?
He points out that that many banks failed during the Great Depression. But those bank failures came well after the economy was severely depressed. Friedman and Schwartz (p. 306) explain how the economy had already declined very significantly by October 1930: "Even if the contraction had come to an end in late 1930 or early 1931 ... it would have been ranked as one of the more severe contractions on record."
That's it. That's all the parallels he mentions about the two economies! He has an interesting discussion about how economists might be in a similar situation today as there were then. I'm not sure that I agree, but anyway this blog is about the economy, not economists.
I stick by my list of top ten reasons why today's economy is fundamentally different from the 1930s:
- Productivity is high today, and was low prior to the 1930s bank panics
- Nonfinancial corporations are very profitable this year, and were not prior to the 1930s bank panics
- GDP had grown at least through 2008 Q2. Friedman and Schwartz (p. 306) explain how the economy had already declined very significantly by October 1930: "Even if the contraction had come to an end in late 1930 or early 1931 ... it would have been ranked as one of the more severe contractions on record."
- The Midwest grew corn very high this year, and was a dust bowl in the 1930s.
- Bank deposits increased during this year's financial panic, they fell during the 1930s (Friedman and Schwartz, Chart 27).
- Today's banks suffer from a crisis of solvency; 1930s banks suffered from depositor-runs (see Anna Schwartz). [Prof. Mankiw acknowledges this]
- Today's failed banks are gobbled up by large investors from around the world. In the 1930s, many of them just failed.
- Today bank lending rates are falling; in the 1930s they were not.
- Today we have inflation (so far); in the 1930s there was deflation (both before and after the bank panics). [Prof. Mankiw acknowledges this]
- Today JP Morgan Chase is buying competitors; in the 1930s JP Morgan was buying competitors (OK, I admit that this hasn't changed!)
Parallels:
ReplyDelete1) There was a crisis dealing with banks and investments.
2) The government got heavily involved.
3) It impacted the presidential election.
4) There was disagreement on what caused it and how to fix it.
5) Investors, who are supposed to understand markets, suddenly appeared very foolish or ignorant.
6) There were worldwide influences and repercussions.
7) Average people suddenly felt very vulnerable financially.
8) People weren't sure what was actually working at the time with the government interventions.
9) There was a lot of government trial and error.
10)We eventually came out of it.
Don the libertarian Democrat
fundamentally different from the 1930s
ReplyDelete====
"different" but not ... insured.
Consider:
1. It's not clear what you intend the *short-run* import of high productivity to be.
2. Unless cash-rich companies start to lend to cash-poor, we could see ... production shortages that are broadly destabilizing.
3. One trouble is that this growth in GDP is perceived to be "low-quality" growth, because it was backstopped by depletion of home-equity to finance consumption, on top of additional revolving consumer credit.
4. Oil is the new corn?
5. They won't matter if the banking system is eventually rendered insolvent (in anything but a gentle way).
6. The general public's beliefs in their deposits can yet be shaken
7. France is building a "sovereign fund" to prevent predatory takeovers ...
8. Let's hope it is enough (of course, lending rates in Japan have been at zero ...)
9. There are no guarantees on the price level, ...
10. J.P.Chase is a lot smaller in relation to overall financial activity nowadays.
However one slices the pie, the financial markets are priced in a way that lends one to think that they are judging that there is a non-zero probability that the "banking" may collapse.
That may be an irrational fear or it may not be. And that's the trouble. The known unkown's that would unlock that conundrum are ... locked up.
Well, it's not the parallels of the thirties you should be concerned with, it is the twenties. Easy credit, government intervention to keep wages high, leveraged speculation, bailouts and loans. The only thing different so far has been free trade.
ReplyDeletehttp://www.youtube.com/watch?v=UO5i4m4uEqc
Considering the recession started December 2007, and that 2008Q2 was the only quarter of five consecutive quarters to show GDP growth, do you stand by this post?
ReplyDelete(I just found your site, so I'm only seeing this now.)