I'm having some intense debates with one of my keynesian teacher. I told him that the 1920's depression saw a bigger contraction in the GDP and in the stock market than during the great depression and that the gov/FED didn't intervene. As a result it was over by a year or two. His answer was: These are 2 different type of depressions; the 1st one (20's) was the result of a bursting bubble (FED printed to finance WW1) and the 2nd one (30's) was a 'balance sheet' depression. Was that a valid argument? I'm about to read rothbard's book on the depression. Will I find the answer to my question in it? If not, could you please recommend me some books ?
Oh brother. This again? It's weird I hadn't heard of this "balance sheet depresson" nonsense before. See this thread that was just created a few days ago on that topic...
Is the current "Financial Crisis" a "Balance Sheet Recession"?
As for America's Great Depression, yes, it's an excellent text on the subject. I also recommend The Politically Incorrect Guide to the Great Depression and the New Deal.
I haven't read The Great Depression, but Rothbard himself called it "one of the great economic works of our time"...so I'd go on a limb and say it's worth a look as well.
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the 1st one (20's) was the result of a bursting bubble (FED printed to finance WW1)
Every recession is the result of a bursting bubble, and every bubble is the result of an increase in the money supply. Rothbard's book spells out where and how the increase happened leading up to the Great Depression. So this distinction is non existent.
and the 2nd one (30's) was a 'balance sheet' depression.
Ask him why a balance sheet depression is different. Why does it need govt intervention when a "standard" depression doesn't? Ask him if Keynes or anyone who advocated govt intervention ever made this distinction before 1999. If not, where they all in the wrong? What did they think was the difference between the 20's and the 30's depressions?
At any rate, from wikipedia on balance sheet recession, it looks like their theory goes like this.
When there is a "normal" recession. the solution is for the govt to lower interest rates artificially [=printing money] and giving it to the banks, who will lend it to businesses, who will use the money to hire people, ending the recession.
But in a balance sheet recession, the big businesses and banks lost so much money that they need tons of cash just to pay off their debts. [Their balance sheets are imbalanced, meaning in the red, hence the name "balance sheet recession".] So they will use the new money to pay their debts, not to hire people. So the only solution is for the govt to take over the economy a further step. The govt should not just print the money, they should spend it as well. This will definately end unemployment, the thinking is.
[What will happen to those poor indebted businesses and banks remains unclear. Will they get their free money on top of all the money the govt will spend on its own? If yes, why not just give them enough to pay all their debts, plus to invest, instead of the govt spending it. If no, is the plan for them all to go bankrupt? Is that how Koo explains what happened in Japan? Everyone went bankrupt, but the country was saved?]
Obviously, this whole theory of Koo's [see wikipedia] only explains why the "usual" govt tricks dont work in a balance sheet recession. But it doesnt explain why nothing at all needed to be done by the govt or anyone in the 20's. Or is he saying the only recession that we need any govt interference to solve is a balance sheet recession? Is he saying the lowering of interest rates is never needed or useful [in regular recessions not needed, in balance sheet ones not useful], but only direct govt hiring of guys to dig ditches is needed and useful?
As for the flaws in the proposed solutions, lowering interest rates and direct govt hiring, the standard AE books explain this. The key is, where does the govt get its money, and what happens to the people the govt takes it from?
Will I find the answer to my question in it? If not, could you please recommend me some books ?
Thing is, "balance sheet recession" is a pretty new phrase being tossed around. It may be hard to find it in Austrian [or any] books, unless they ar epretty recent. So you may find the answer in Rothbard indirectly, but he won't spell it out.
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Do you think this new notion of a "balance-sheet recession" could be an example of memetic engineering? That is, could it be an example of deliberately creating plausible-sounding ideas that will muddy the water of truth, if not turn the public tide against it?
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That sounds a bit more conspiracy oriented than I am led to believe the truth lies.
Originally I couldn't fathom that such smart people could think such stupid things, but the more I've dealt with these people the more I've come to agree with Hayek's assessment, although I still struggle with this.
In the beginning of the video Bork brings up the fact that he noticed what he calls an enormous resistance by very bright people, to what are fairly basic and simple ideas of economics. His conclusion was the possibility that something more than intellectual error is at work...and he even uses the word "sinister". Hayek's response is that it is quite understandable that intellectuals would reject that which they did not understand...that which was unintelligible to them. This is the part I have a problem with, which I'll get to shortly... But his point is much clearer and more compelling by the end of the clip...his feeling is that intellectuals operate under the notion that nothing can be good unless it can be demonstrated that in that particular case it achieves a good object, which of course is impossible, because a social subject like economics can only be understood in principle but not in detail. (Which kind of goes to a sort of deductive reasoning versus empiricism point). I have to admit when I first saw that interview I didn't have the same take on it. I even found it a bit difficult to follow. As time has progressed I find I can much better appreciate the optimism and brilliance of his last statement: "I think I would give them the benefit of the doubt at least...I think in most instances it is a deeply ingrained intellectual attitude which forces them to disapprove of something which is unintelligible and to prefer something which is visibly directed to a good purpose." That I understand and can (at least to some degree) buy as a viable reasoning for the animosity and belligerence of statists. It would certainly explain the overwhelming acceptance of so many government programs. But what I still have trouble with is the idea that the alternative is unintelligible to them.
I have a hard time understanding how things as simple as the broken window fallacy could be so blatantly invoked. But people like Fool on the Hill make a really strong case for the notion that yes, they actually don't understand...and actually do believe what they are saying.
Abdel, you may find this lecture by Joseph Salerno helpful. He explains what a "balance sheet" recession/depression is pretty well.
He does indeed explain the current recession very well.
But he doesn't go into what a balance sheet recession is, how it differs from a "regular" recession,
All he does is mention the words once, with no explanation.
Great video, though.
Dave,
He doesn't contrast a balance sheet recession from a "regular" recession (i dont think there is a difference?) but I think he demonstrates pretty well how people may view this recession as a balance sheet recession by showing how $23 trillion of "wealth" just disappeared over night don't you think? Maybe that wasn't his intention but after watching that video I could see how some could view this recession a balance sheet recession though I don't think there is really a difference.