Sunday, May 3, 2009

I think they made a big mistake by not bailing out Lehman Brothers, I think they recognized that two days later

From Marginal Revolution:

Interview with Robert Barro, on the New Deal and Great Depression

From The Browser, here is one bit:

It’s clear that a lot of the policies that were put into place were negative, but as to sorting out how important they were, that’s a much more challenging question. And I think Roosevelt at the time recognized ex-post that some of the things he tried were failures and then his attitude was “OK, it’s a failure I’ll stop doing it.” Which is actually pretty positive. For example, some of the things he did was try to organize labor unions and also businesses essentially promoting monopoly – I don’t think that was a plus. He was trying really hard to keep wages and prices from falling with direct influence and that was a negative. The effect of the expenditure programs is less clear. In the mid-1930s with the New Deal there was an unusual amount of infrastructure-type of expenditures. But it’s not actually big enough to sort out in a statistical sense -- to figure out how much it mattered in terms of the recovery after the trough in 1932-33. I don’t think we know that that was a mistake, but it’s not clear that it was all that important.

Barro also offers a reading list on the topic.

Posted by Tyler Cowen"


Three good points:

"1)The New Deal is part of my research, and it’s bigger than the other non-defense expenditure in terms of stimulus, but it’s not enough to really sort it out.

So I don’t think you can reliably say what the effect is.

2) Well Bernanke was thinking that way even a year ago. I remember talking to him at the time, in April, just after the Bear Stearns initial intervention. I got a chance to ask him a question about why they were so aggressive at that time when things didn’t look so bad. And his response was that basically he was worrying about a Depression-type scenario – and trying to act early to nip that in the bud.

3) Since the Lehman disaster – I think they made a big mistake by not bailing out Lehman Brothers, I think they recognized that two days later. I think that was Paulson’s individual fault and responsibility from what I can gather."

My main disagreement is that it's not clear what he means by stimulus. I'm assuming that he's for Automatic Stabilizers, so is he simply talking about infrastructure and other spending. As well, I though that he backed what he called 'incentives', like tax cuts. By the way, my choice, a sales tax decrease, is working in the UK with the VAT decrease.

"I think the stimulus package was very stupid; it was awful. It’s just a tremendous waste of money and it’s going to cause some trouble in terms of a bigger public debt, it’s just wasting resources. But the more important thing is the financial system, and somewhat the housing related aspects. So on that, despite a lot of floundering around, mostly I think what they were doing is in the right direction."

I think I agree. It's just that the spending is part of the political floundering around. I don't think that calling it stupid or awful is really called for. Isn't humility an obvious byproduct of this crisis? I do think that a placebo and investment case can be made for infrastructure spending, and Shiller is correct in believing that a massive stimulus would do the trick. However, like Barro, I don't that that we can afford to chance the massive debt.

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