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30.12.2014

What were major causes of great depression, hearing aids with tinnitus masking - PDF Review

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It happened--as it had always happened whenever economics had thought that they had it figured out--we were wrong.
We were wrong, as we have discovered over the past six years as people attempted to do economic policy, that we had misjudged how to reliably keep economies running at a high level of prosperity. Our demonstrated wrongness means that a substantial amount of what economists like me were teaching, both about the structure of the economy today and about the Great Depression, was wrong.
Six years ago we economists saw the Great Depression as something the Federal Reserve system could, should, and ought to have stopped dead in its tracks at its beginning. As of six years ago, most economists saw the Great Depression of the 1930s in the mirror that the late Milton Friedman and the late Anna Jacobson Schwartz had held up in the "Great Contraction" chapter of their Monetary History of the United States. Back in 1931, as the Great Depression gathered force, the dominant view was that the economy was suffering from a liquidity squeeze. Over 1931 to 1933, as the Great Depression gathered force, the then-Federal Reserve attempted to carry out this set of policies, and President Hoover attempted to back them up. In the end, recovery from the Great Depression does not begin until countries give up on the combination of the Bagehot Rule and of commitment to sound gold-standard finance. The scenario envisioned by Bagehot and company--an excess demand for cash, coupled with an excess supply of labor, currently-produced goods and services, bonds, and stocks--is just one modality of the kind of financial squeeze that can cause a depression. Macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. Sometime in your lives some famous economists will say again that a class of economic problems have been solved--maybe of generating healthy long-run growth, maybe of keeping the distribution of wealth from going awry, maybe of preventing depressions. Back in 2002 Ben Bernanke--then simply a governor of the Federal Reserve, not yet Chair of the President’s Council of Economic Advisers and not yet Chair of the Federal Reserve--doubled down on the Friedman-Schwartz Monetary History interpretation of the Great Depression and its application to the modern economy. The brilliance of Friedman and Schwartz's work on the Great Depression is not simply the texture of the discussion or the coherence of the point of view. The belief was that the financial system was strong and robust, and that anyway the Federal Reserve knew what to do in the event that there did become a big financial crisis. The generalization from the Monetary History--the belief that the Great Depression taught us lessons, that those lessons were summarized in the Monetary History, and that following that plan of treatment would keep the economy from falling and remaining significantly below potential--that generalization was wrong. Let me recapitulate, and remind you what we thought we had learned from the Great Depression when we tried to apply its lessons to today, and so bring back to the forefront of your minds the doctrines the failure of 2008-2013 to turn out as we would have expected from the Monetary History has cast into doubt. Recall that, back in 1931, the Bagehot Rule held that the right way to deal with a financial crisis that would prevent a liquidity squeeze and thus a long depression to allow insolvent banks to fail while rescuing merely illiquid ones--thus keeping the financial system from collapse, and so setting up a situation in which interest rates would quickly return to normal values after the financial crisis was over.
Friedman and Schwartz were very clear that keeping the money stock on its proper trajectory might well require a central bank to go well beyond the Bagehot Rule. As we now see it, what happened in 2008--and what happened in 1931--was not a liquidity squeeze but instead a safety squeeze. And we had misjudged how to reliably keep economies running at a high level of prosperity because we had misjudged what the Great Depression was.
A consequence of the past six years is that we economists need to rip up a substantial part of our lecture notes--both the modern macro lectures on proper policy during business cycles, and also our economic history lectures about the Great Depression. Raghuram Rajan--who has just been named the governor of The Bank of India, India’s central bank--argued that recent changes in financial deregulation had created a situation in which there were too many many cowboys on Wall Street doing too many things and creating too many risks. People like the University of Chicago’s Jacob Vinear walked a path that would later be walked by John Maynard Keynes and Milton Friedman: that the most important thing to do in the Great Depression was to get spending up--to flood the economy with liquidity and, in Keynes's case, if no one else is spending then the government should step up. Their message was that was the Great depression had shown was that the liquidity squeeze doesn’t show itself necessarily as a high rate of interest on treasury debt.
The victory was so complete that Milton Friedman's successor at the University of Chicago, Robert Lucas, told the assembled economists of America in 2003 that they should no longer do business-cycle macroeconomics: that the problem of depression-prevention had been solved, and there were no major issues left to work on. Their work was among the first to use history to address seriously the issues of cause and effect in a complex economic system, the problem of identification… they make a powerful case indeed. There were furious arguments among economists as to how big the bubble was--or indeed, whether there is a bubble or merely "froth". Simply keep the money stock growing smoothly or perhaps a little more aggressively than smoothly, and you build a firewall between whatever financial distress there was and the real economy of production and employment.


Its counterparties on Wall Street were no longer sure that it was solvent, and they were sure that there were many among their fellows who were no longer sure that it was solvent.
Perceived risks that one's liquid assets in the form of debts owed by or through systemically-important money-center banks might become illiquid and impaired would greatly diminish the demand for risky assets, and lower their price. There are claims that the Federal Reserve and the Treasury lacked the legal authority to provide support for Lehman Brothers in September--that its assets were too impaired.
From the perspective of what we thought we knew as a result of the Great Depression, the last five years have been a great surprise. People didn't decide that they were simply short of cash and so cut back on their spending, and they would not have pushed their spending rapidly back to normal levels if the Federal Reserve had simply provided the economy with enough cash to make them happy. This is what Hyman Minsky--who used to teach at Washington University in St Louis--taught over and over and over again.
Under Takahashi Korekiyo, Japan abandons the gold standard, devalues its currency in order to boost demand by making its export industries hyper-competitive and generating an export boom, and embarks on a massive program of armaments so that it can become a full-fledged colonial power and construct what the Japanese government called the Greater East Asia Co-Prosperity Sphere. Define what the American Dream means, in your own words if you can.The American Dream means, well not much to me. The fact that we had a faulty vision of the Great Depression was a caused of the policy errors and macroeconomic disaster of our day, And the fact that following the policy course that we did did not cure the problems of today has led us to revise our view of the Great Depression. The general response--from Ben Bernanke and Alan Greenspan, from Arminio Fraga and Larry Summers, and from many many others, from practically everyone speaking to the group in the room save Alan Blinder--was: yes, there are cowboys, and the cowboys will lose money, but their actions will not cause any large-scale damage to the economy. Those were the policies that Friedman and Schwartz's work said would have cured the Great Depression easily back in the early 1930’s. In such a situation interest rates spike: people are willing to promise to pay you back a great deal more liquid cash money in a year if you will let them have your liquid cash money to spend now, and people are willing to let interest- and dividend-paying financial assets go now for a song if you can pay cash right now.
This year's spending cuts were neutralized by next year's revenue losses as economic activity fell further. On the other side were the Joseph Schumpeters, the Friedrich Hayeks, the Lionel Robbins, and company saying: “Wait a minute things have to be more complicated, there have to be deep structural problems in the economy.
What you need to do, Friedman and Schwartz said is look not at prices but at quantities: develop a statistical system to keep track of how much people are holding in the way of currency and bank deposits--money--and watch that very closely. And do note that Robert Lucas’s declaration was the third time that economists had proclaimed victory over the business cycle and over depressions: Walter Heller, Lyndon Johnson's chief economist, had said the same thing in the 1930s. In March people did roughly the following calculation: 5 million excess houses built using dodgy subprime finance, $100,000 of mortgage debt on each of those houses that was not likely to be repaid, three-fifths of that mortgage debt in the hands of commercial banks and thus guaranteed but the FDIC, two-fifths of that securitized and in the form of MBS CDO's--people owning CDOs were going to get an unpleasant surprise in the form of a loss of $200 billion, although nobody in March was quite sure where that missing $200 billion would turn out to be (but everyone thought Bear-Stearns had a big chunk). You see a change in the rate of growth in 1994, when Alan Greenspan decided that the economy is getting close enough to full employment and he needs to start putting on the brakes to some degree. Looking at 2009, there seems to be a very strong argument that if the Federal Reserve had in 1931 done what Ben Bernanke did in 2009, it might well have made things better, perhaps significantly better, but it probably wouldn’t have fixed things completely. The more time passes since the last financial crisis and depression, the more people become willing to take on risks.
Another big crash came, but it came not one generation later--after all the people who had lived through the last crash retired, and after they were no longer around to urge caution on portfolio managers--but two generations later instead. Thus, we would have said six years ago, if anything even remotely Great Depression-like comes down the tracks, we can stop it did. But those policies did not work in 2008-10 or, at least, did not work well enough: today we still have a substantially depressed economy--not nearly as bad as the Great Depression, where the unemployment rate rose not by 6% points but by 18% points, but certainly bad enough. Thus businesses don’t have to worry in the aggregate that there isn’t going to be enough demand to buy what businesses make in general.
Because even though interest rates were low and thus there was no sign of a liquidity squeeze in financial markets, there were idle factories and unemployed workers and thus signs of a liquidity squeeze in the real economy. And Milton Friedman’s teacher Jacob Viner's teacher Irving Fisher had said the same thing in the summer of 1929 just before the start of the Great Depression--and coupled it with a forecast that because the Federal Reserve now understood its job (and because with Prohibition the U.S. Everyone in 2005 saw the industrialization of China as putting a lot of pressure on world energy supplies--that we were never again going to see the real oil prices we has seen since 1986 or before 1979, and that meant that commuting costs were going to be higher.
And then, one weekend in March, the adverse-selection meltdown took place: the higher the interest rates Bear-Stearns offered to pay on that portion of its liabilities it had to rollover immediately, the less willing were its potential counterparties to lend to it, and it became clear that Bear-Stearns would fail to repay those of its debts due on Monday and would be forced into bankruptcy if nothing was done over the weekend.


It was thought in the spring when Bear-Stearns hit the wall, when the total losses to be allocated to Wall Street were thought to be $200 billion of dud MBS CDOs, that it was worth committing the U.S.
Whatever the rapid full-employment restoring mechanisms we used to think the American economy had--it does not have them now. You do not need to worry that we will once again, as in The Great Depression, find ourselves in an economy that is not just depressed but profoundly depressed, and depressed not for a year or two but for more than five--and perhaps more than ten. And at the end of their chapter Friedman and Schwartz had a strong message: the Federal Reserve had the technocratic policy tools to keep the economy's money stock growing at a stable rate in the 1930s, and if it had done so there would have been no Great Depression.
There is good reason to worry that people won't demand what you make in particular--if you are making lattes while what people want to buy is yoga lessons, you are in trouble (and the yoga instructors are in clover). We can't just stimulate the economy!” But they were without a terribly good or coherent idea of what those deeper problems might be.
In such a situation, they also feel like their holdings of safe assets are at or below what they should be.
Yet here you are, telling the Federal Reserve that when a depression threatens it should not look at prices but instead it should look at quantities--it should act not like an agent in the market economy but instead much more like the late Soviet Union’s GOSPLAN, focusing on quantity balances.
The decline in the Great Depression was 4.5 times as great and went on for more than twice as long.
If the Federal Reserve and done that, Friedman and Schwartz claimed, it would have stopped the Great Depression in its tracks. So we conclude that we badly need to rethink what we thought we knew about the Great Depression. The depression was the result not of everyone's trying to build up their liquidity but everyone trying to pay down their debt--to deleverage, to move to a safer portfolio.
As private businesses and households were unwilling to spend as they sought to deleverage, foreign purchasers of Japanese exports and the Japanese government took up the slack. So when people want to spend less than they are earning in order to build up the stock of liquid cash money they are holding, it is the job of the central bank to print up banknotes and buy things with them in order to keep employment and production full and in order to create enough liquid cash money in the system that people will once again plan to spend what they earn buying useful goods and services--and note that buying a real property or a piece of producer's durable equipment as an investment for the future is just as much spending as buying a loaf of bread.
It was thought in the fall, when the losses to be allocated to Wall Street were four times as large, that it was not. You can also see Y2K: the worry back in 1999 that all of these computer programs had been written assuming that the year was a two digit number because years were always in the 20th century, and when it became the 21st century, all kind of programs would fail and piece of the financial system would freeze.
The keep-the-money-stock-growing route appears to work much less well: that’s what we know about today. Maybe two out of seven of its big components were strong positives, one was probably a strong negative, the rest a wash or at best weak positives.
It may take quite a while to convert coffee shops to yoga studios and retrain baristas to do the downward-facing dog, and the value of fancy espresso machines may well nosedive causing financial chaos if they are the ultimate support of financial derivatives. Find an image to support your research.The "Dust Bowl", a sand storm, caused by erosion and overworking of farmlands, caused by the great depression.
With the great depression, farmers were forced into overworking their lands to keep them alive, not realising the consequences.
You had higher capital and reserve requirements for banks, which are very good things in the long run--but not in the middle of a depression, when you want banks to lend more not less. Due to the overworking the soil become lose, lack in nutrients to keep the soil healthy, with high winds it caused the soil to break and lift up. But there were economists who were claiming in 2006 that all of the rise in housing prices was "fundamental".
And there was a still larger group of economists--in fact, nearly everyone--saying that should the housing bubble crash and bring on a financial crisis, the Federal Reserve will follow the policies that Friedman-Schwartz had determined would have prevented the Great Depression. It would thus build a firewall between whatever happened on Wall Street and the real economy of demand, production, and employment.



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