[PEN-L:28436] RE: The D word surfaces

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: The D word surfaces

Michael Perelman writes: > Doug's suspicion squares with Friedman & Schwartz who attribute the  problem to the death of Ben. Strong, leaving a vacuum of intelligence.<

F&S are really silly some times.

> Let me suggest another possibility:  Recall that Keynes was writing about the importance of deflating the bubble in the Treatise, which must have been mostly written well before the crash.  He was sympathetic about the Fed wanting to deflate the speculative bubble without harming "enterprise" -- sort of in line with some of Greenspan's inconsistent rhethoric before the crash (???).  The question is can the two be separated.<

According to F&S, in the late 1920s, Federal Reserve policy was "too easy to break the speculative boom, yet too tight to promote healthy economic growth" [quoted in Temin, 1976, _Did Monetary Forces Cause the Great Depression?_: 23]. This may have been a key problem for Greenspan during the bubble years: if he raised rates too much, it would encourage recession (hurting "enterprise"), while not raising them enough would allow the bubble to continue (encouraging "speculation"); the problem was that the interest rate needed to shrink the bubble was higher than the maximum interest rate that wouldn't cause recession. (Of course, he could have raised the margin requirements...) AG's inconsistent rhetoric may be a result of being stuck on the horns of this contradiction. Frist he warns of irrational exuberance; then he embraces the "new economy" as explaining the seeming miracle of the coincidence of relatively low unemployment and inflation...

> Much of the discussion about how the Fed could have saved the day would not make sense if capitalism has contradictions, which   require crises to temporarily wring out the problems.

>Let's assume that we have a big depression in 2003.  Not a prediction, just an assumption.  Will historians blame Greenspan for bursting the bubble or will they say that he just should have done so earlier.  Can the system really avoid problems through good management?<

we'll see. I bet that people won't be calling AG "Maestro" any more.
JD