Crisis Economics Part 15

Chapter 1: The White Swan.

14 on the eve of the Great Depression: The single best account of the crash remains John Kenneth Galbraith, The Great Crash, 1929 (Boston: Houghton Mifflin, 1954).

15 "At this juncture . . .": Ben S. Bernanke, "Economic Outlook," testimony before the Joint Economic Committee, U.S. Congress, March 28, 2007; online at http://www.federalreserve.gov/newsevents/testimony/bernanke20070328a.htm.

15 "I don't think it poses . . .": Paulson quoted in Kevin Carmichael and Peter Cook, "Paulson Says Subprime Rout Doesn't Affect Economy," Bloomberg.com, July 26, 2007, online at http://www.bloomberg.com/apps/news?pid=20601087&sid=aBvlvvm.ISfo&refer=home.

16 "Looking forward . . .": Henry M. Paulson, Jr., remarks to the Was.h.i.+ngton Post 200 Lunch, Was.h.i.+ngton, D.C., May 16, 2008, online at http://www.ustreas.gov/press/releases/hp981.htm.

16 "Sure . . . there are trouble spots . . .": Donald Luskin, "Quit Doling Out That Bad-Economy Line," Was.h.i.+ngton Post, September 14, 2008.

16 "black swan": Na.s.sim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007).

18 households used their homes as collateral: Karl E. Case, John M. Quigley, and Robert J. s.h.i.+ller, "Comparing Wealth Effects: The Stock Market versus the Housing Market," Advances in Macroeconomics 5 (2005): 1-34.

18 home equity withdrawals: See Gene Sperling, "Housing Bust Meets the Equity Blues," Bloomberg.com, April 19, 2007, online at http://www.bloomberg.com/apps/news?pid=20601039&sid=a.mcWxg9aJ_E; Alan Greenspan and James Kennedy, "Sources and Uses of Equity Extracted from Homes," Working Paper no. 2007-20, Finance and Economics Discussion Series, Federal Reserve Board, online at http://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf.

18 "This time is different": Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, N.J.: Princeton University Press, 2009).

20 Before the rise of capitalism: Reinhart and Rogoff, This Time Is Different, 86-89, 101-11, 174-81.

20 The Chinese pioneered: Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relations.h.i.+ps (Cheltenham, U.K.: Edward Elgar, 2003), 53.

20 "tulip mania": See, for example, Peter M. Garber, "Tulipmania," Journal of Political Economy 97 (1989): 535-60; Anne Goldgar, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age (Chicago: University of Chicago Press, 2007).

20 John Law's Mississippi Company: John Law, A Full and Impartial Account of the Company of Mississippi (London, 1720); Antoin E. Murphy, John Law: Economic Theorist and Policy-Maker (Oxford: Clarendon Press, 2007).

21 South Sea Company: Rik G. P. Frehen, William N. Goetzmann, and K. Geert Rouwenhorst, "New Evidence on the First Financial Bubble," National Bureau of Economic Research Working Paper no. 15332, September 2009.

21 the panic of 1825: Larry Neal, "The Financial Crisis of 1825 and the Restructuring of the British Financial System," Federal Reserve Bank of St. Louis Review, May-June 1998, 53-76; Michael Bordo, "Commentary," Federal Reserve Bank of St. Louis Review, May-June 1998, 77-82.

21 "a period of frantic . . .": Walter Bagehot, Lombard Street: A Description of the Money Market (New York: E. P. Dutton, 1920), 190.

21 the panic of 1857: G. W. Van Vleck, The Panic of 1857: An a.n.a.lytical Study (New York: Columbia University Press, 1943); Charles W. Calomiris and Larry Schweikart, "The Panic of 1857: Origins, Transmission, and Containment," Journal of Economic History 51 (1991): 807-34.

22 Countries around the world: Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises (New York: Basic Books, 1978), 129-30.

22 the crisis of 1873: Ibid., 132-133; Michael Bordo, "Discussion: The Panic of 1873 and Financial Market Volatility and Panics Before 1914," in Eugene White, ed., Crashes and Panics: The Lessons from History (Homewood, Ill.: Business One Irwin, 1990), 126-32.

23 The crisis of 1907: Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market's Perfect Storm (Hoboken, N.J.: John Wiley and Sons, 2009).

23 the money supply sharply contracted: Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, N.J.: Princeton University Press, 1963), 299-419.

23 "leave-it-alone liquidationist": Hoover quoted in Kindleberger, Manias, Panics, Crashes, 139-40.

24 the worst depression in its history: David M. Kennedy, Freedom from Fear: The American People in Depression and War, 1929-1945 (New York: Oxford University Press, 1999).

24 Many nations in Europe: Charles P. Kindleberger, The World in Depression, 1929-1939 (Berkeley: University of California Press, 1986); Reinhart and Rogoff, This Time Is Different, 71-73, 111.

24 Bretton Woods: Michael D. Bordo and Barry J. Eichengreen, eds., A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform (Chicago: University of Chicago Press, 1993), 3-108.

25 All good things: Peter M. Garber, "The Collapse of the Bretton Woods Fixed Exchange Rate System," ibid., 461-494.

25 Every silver lining: Timothy Curry, "The LDC Debt Crisis," in FDIC Division of Research and Statistics, History of the Eighties: Lessons for the Future (Was.h.i.+ngton: FDIC, 1997), 1:191-210.

26 the Great Moderation: James H. Stock and Mark W. Watson, "Has the Business Cycle Changed and Why?" NBER Macroeconomics Annual 2002 17 (2003): 159-218.

26 What accounted for the Great Moderation: The literature on the Great Moderation is extensive. See, for example, s.h.a.ghil Ahmed, Andrew Levin, and Beth Anne Wilson, "Recent U.S. Macroeconomic Stability: Good, Policies, Good Practices, or Good Luck?" Review of Economics and Statistics 86 (August 2004): 824-32; James Kahn, Margaret McConnell, and Gabriel Perez-Quiros, "On the Causes of the Increased Stability of the U.S. Economy," Federal Reserve Bank of New York, Economic Policy Review 8 (2002): 183-202; Jordi Gali and Luca Gambetti, "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics 1 (2009): 26-57.

27 "optimistic for the future": Ben S. Bernanke, "The Great Moderation," remarks to the Eastern Economic a.s.sociation, Was.h.i.+ngton, D.C., February 20, 2004, online at http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htm.

27 j.a.pan in the 1980s: Paul Krugman, The Return of Depression Economics (New York: W.W. Norton, 1999), 60-82; Takatos.h.i.+ Ito, "Retrospective on the Bubble Period and Its Relations.h.i.+p to Developments in the 1990s," World Economy 26 (2003): 283-300; Mitsuhiro f.u.kao, "j.a.pan's Lost Decade and Its Financial System," World Economy 26 (2003): 365-84.

28 a financial crisis engulfed Norway: Harald A. Benink and David T. Llewellyn, "Fragile Banking in Norway, Sweden and Finland: An Empirical a.n.a.lysis," Journal of International Financial Markets, Inst.i.tutions and Money 4 (1994): 5-19.

28 savings and loan a.s.sociations: Timothy Curry and Lynn s.h.i.+but, "The Cost of the Savings and Loan Crisis: Truth and Consequences," FDIC Banking Review 13 (2000): 26-35.

28 countries in Latin America and Asia: Nouriel Roubini and Brad Setser, Bailouts or Bail-Ins? Responding to Financial Crises in Emerging Economies (Was.h.i.+ngton, D.C.: Inst.i.tute for International Economics, 2004).

29 Long-Term Capital Management: Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000).

29 Crises continued to materialize: Roubini and Setser, Bailouts or Bail-Ins, 61-70.

31 "There is no national housing bubble": Daniela Deane, "In Real Estate Fever, More Signs of Sickness," Was.h.i.+ngton Post, April 17, 2005.

31 "the charm of history . . .": Aldous Huxley, The Devils of Loudun (London: Chatto and Windus, 1952), 259.

31 greed: See, for example, Ruth Gledhill, "Rowan Williams Says 'Human Greed' to Blame for Financial Crisis," Times (London), October 15, 2008.

33 "we should be quite cautious . . .": Alan Greenspan, "Consumer Credit and Financial Modernization," remarks to Economic Development Conference of the Greenlining Inst.i.tute, San Francisco, Calif., October 11, 1997, online at http://www.federalreserve.gov/boarddocs/speeches/1997/19971011.htm.

33 "lenders are now able . . .": Alan Greenspan, remarks to the Federal Reserve System's Fourth Annual Community Affairs Research Conference, Was.h.i.+ngton, D.C., April 8, 2005, online at http://www.federalreserve.gov/boarddocs/speeches/2005/20050408/default.htm.

33 slas.h.i.+ng the rate: Jean Claude Trichet, "Activism and Alertness in Monetary Policy," lecture to "Central Banks in the 21st Century" conference, Madrid, June 8, 2006, online at http://www.ecb.int/press/key/date/2006/html/sp060608_1.en.html.

Chapter 2: Crisis Economists.

39 "Practical men, who believe . . .": Keynes, General Theory, 383.

40 "invisible hand": Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: Charles Knight, 1835), 3:112; Robert L. Heilbroner and Lester C. Thurow, Economics Explained (New York: Touchstone, 1987), 25-31.

40 economists refined and reworked: Denis P. O'Brien, "Cla.s.sical Economics," in Warren J. Samuels, Jeff E. Biddle, and John B. Davis, eds., A Companion to the History of Economic Thought (Oxford: Blackwell, 2003), 112-29; Alessandro Roncaglia, The Wealth of Ideas: A History of Economic Thought (Cambridge, U.K.: Cambridge University Press, 2005), 179-243, 278-96, 322-83.

40 Louis Bachelier: Louis Bachelier, "Theorie de la speculation," in Annales Scientifiques de l'ecole Normale Superieure 3 (1900): 21-86; Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York: Harper Business, 2009), 6-8.

40 "The consensus of judgment . . .": Lawrence quoted in John Kenneth Galbraith, The Great Crash, 1929 (Boston: Houghton Mifflin, 1954), 75.

41 postwar academic departments: Fox, Myth of the Rational Market, 89-107.

41 "random walk" theory: Burton G. Malkiel, A Random Walk Down Wall Street (New York: W.W. Norton, 1973).

41 "Don't bother . . .": Andrew W. Lo and A. Craig MacKinlay, A Non-Random Walk Down Wall Street (Princeton, N.J.: Princeton University Press, 1999), 6.

41 Yale economist Robert s.h.i.+ller: Robert J. s.h.i.+ller, "Consumption, a.s.set Markets and Macroeconomic Fluctuations," Carnegie-Rochester Conference Series on Public Policy 17 (1982): 203-38.

42 "While markets are not totally crazy . . .": Robert J. s.h.i.+ller, "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives 17 (2003): 90.

42 "models of human psychology . . .": Ibid.

42 recent research in behavioral finance: Ibid.; Fox, Myth of the Rational Market, 175-210, 247-64.

42 "fundamental parameters . . .": s.h.i.+ller, "From Efficient Markets Theory," 94.

42 "biased self-attribution": Kent Daniel, David Hirshleifer, and Avanidhar Subramanyam, "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance 53 (1998): 1839-85.

43 "some accident . . . sets speculation . . .": John Stuart Mill, Principles of Political Economy (London: Longmans Green, 1909): 527-29.

45 William Stanley Jevons: Sandra J. Peart, "Sunspots and Expectations: W. S. Jevons's Theory of Economic Fluctuations," Journal of the History of Economic Thought 13 (1991): 243-65.

45 Karl Marx: Robert L. Heilbroner, The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (New York: Touchstone, 1999), 136-69; Roncaglia, Wealth of Ideas, 244-77.

45 "Modern bourgeois society . . .": Karl Marx and Friedrich Engels, The Communist Manifesto (New York: Penguin, 2002), 225-26.

47 John Maynard Keynes: Heilbroner, Worldly Philosophers, 248-87; Roncaglia, Wealth of Ideas, 384-88.

47 no ordinary economist: Heilbroner and Thurow, Economics Explained, 38-39.

47 "I believe myself to be writing . . .": Keynes quoted in Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975), 3.

48 "paradox of thrift": Keynes, General Theory, 84.

48 "animal spirits": Ibid., 162.

49 "We Are All Keynesians Now": "The Economy: We Are All Keynesians Now," Time, December 31, 1965.

49 Friedman and his coauthor: Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, N.J.: Princeton University Press, 1963), 299-419.

49 most notably Peter Temin: Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: W.W. Norton, 1976).

50 "b.a.s.t.a.r.d Keynesianism": Joan Robinson, What Are the Questions? And Other Essays: Further Contributions to Modern Economics (Armonk, N.Y.: M. E. Sharpe, 1980), 34.

50 "Instability . . . is an inherent . . .": Hyman Minsky, Stabilizing an Unstable Economy (New York: McGraw-Hill, 2008), 134.

50 "Implicit in [Keynes's] a.n.a.lysis . . .": Minsky, John Maynard Keynes, 11-12.

51 "The interposition of this veil . . .": John Maynard Keynes, Essays in Persuasion (New York: W.W. Norton, 1963), 169.

51 Financial Instability Hypothesis: Hyman Minsky, "The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to 'Standard' Theory," and "The Financial Instability Hypothesis: A Restatement," both in Minsky, Can "It" Happen Again? Essays on Instability and Finance (Armonk, N.Y.: M. E. Sharpe, 1982), 59-70, 90-116.

52 Irving Fisher: Irving Fisher, "The Debt-Deflation Theory of Great Depressions," Econometrica 1 (1933): 346.

54 The Austrian School: See Steven Horwitz, "The Austrian Marginalists: Menger, Bohm-Bawerk, and Wieser," and Peter J. Boettke and Peter T. Leeson, "The Austrian School of Economics: 1950-2000," both in Samuel, Biddle, and Davis, eds., Companion to History of Economic Thought, 262-77, 445-53.

54 Schumpeter's worldview: Joseph Alois Schumpeter, Capitalism, Socialism, and Democracy (London: Routledge, 2006), 81-86.

55 According to some Austrian economists: See, for example, Murray Rothbard, America's Great Depression (New York: New York University Press, 1973).

56 "Greenspan put": Peronet Despeignes, "Greenspan Put May Be Encouraging Complacency," Financial Times, December 8, 2000; Marcus Miller, Paul Weller, and Lei Zhang, "Moral Hazard and the US Stock Market: a.n.a.lysing the 'Greenspan Put,' " Economic Journal 112 (2002): C171-86.

57 the road that j.a.pan paved in the 1990s: See, for example, Benjamin Powell, "Explaining j.a.pan's Recession," Quarterly Journal of Austrian Economics 5 (2002): 35-50.

57 Economists who swear fealty to Keynes: Krugman, Return of Depression Economics, 74-77; Charles Yuji Horioka, "The Causes of j.a.pan's 'Lost Decade': The Role of Household Consumption," j.a.pan and the World Economy 18 (2006): 378-400.

59 "economists set themselves . . .": John Maynard Keynes, A Tract on Monetary Reform (London: Macmillan, 1923), 80.

59 "Well, . . . this is probably a change . . .": Conor Clarke, "An Interview with Paul Samuelson, Part Two," Atlantic, June 18, 2009, online at http://correspondents.theatlantic.com/conor_clarke/2009/06/an_interview_with_paul_samuelson_part_two.php.

60 Scottish journalist: Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (London: National Ill.u.s.trated Library, 1852). This expanded edition replaced the original work published in 1841.

Chapter 3: Plate Tectonics.

62 In the 1840s Great Britain: C. N. Ward-Perkins, "The Commercial Crisis of 1847," Oxford Economic Papers 2 (1950): 75-94; H. M. Boot, The Commercial Crisis of 1847, Occasional Papers in Economic and Social History, no. 11 (Hull, U.K.: Hull University Press, 1984).

63 The same argument could be made: The single best argument for the positive effects of bubbles is Daniel Gross, Pop! Why Bubbles Are Great for the Economy (New York: Harper Business, 2007).