What do you think caused the GD?

[woolfe9999]

Multiple causes. The premise of the poll is foolish.

- wolf

 

[bamacre]

Nonsense. The first rule of markets is that the all the information available has already been acted on. So it's the people trying to game the markets, regular investors thinking they know something that has not already been acted on, who are the suckers. And it is these suckers (and those who feed upon them) that cause every boom and bust cycle.

A hypothetical example: a stock (pick any) goes up based on factual information in the market. Some suckers see this as evidence that the stock is "hot" and will continue to go up. Their after-the-fact action in the market continues to drive the price up, over and above the fundamental reasons why it did so in the first place. Other see this as evidence of a "rally," and push it further to lofty heights. Champagne corks pop in celebration. Then, some decides to sell to pay for the champagne, the bubble deflates, and the stock returns, after some fluctuations, to a reasonable value based upon the actual factors supporting it. The suckers call this a bust, cry, and then promptly move on to the "hot ticket," the next bubble and the next fleecing.

Now, I'm not arguing against regulation per se, but has anyone ever stopped to consider some basic education and common sense first? Because... I'm sorry, but you're not victims... you're greedy and should know better.

This is a good post.

A couple of things. One, most of the victims are not the ones participating in the shenanigans. Sure, there's a loss of wealth at the top when the bust comes, but it's the poor and middle class that suffer the high unemployment. However, another way of looking at this is they had jobs they otherwise shouldn't have had, there's a missallocation of resources during the boom. The argument will always be, can the government regulate enough to keep the boom in check, or do we have to get rid of the boom altogether.

Back to your post, Vic, in some way, what you're describing is similar to Hayek's BCT. Of course he looks at it from a different angle.

 

[Fear No Evil]

Why isn't Bush an option?

 

[BigDH01]

This is a good post.

A couple of things. One, most of the victims are not the ones participating in the shenanigans. Sure, there's a loss of wealth at the top when the bust comes, but it's the poor and middle class that suffer the high unemployment. However, another way of looking at this is they had jobs they otherwise shouldn't have had, there's a missallocation of resources during the boom. The argument will always be, can the government regulate enough to keep the boom in check, or do we have to get rid of the boom altogether.

Back to your post, Vic, in some way, what you're describing is similar to Hayek's BCT. Of course he looks at it from a different angle.

It is also a tacit admission that actors often don't behave rationally or that humans have an insufficient time scope. As individuals, we are unable to properly assess long-term risk vs short term profit. I don't know if this is a consequence of our culture or something innate to creatures with finite lifetimes.

I know it is common among people to assume that it is enough that the market punishes stupid decisions, but if you concede that actors often don't behave rationally, then you have to question the effectiveness and efficiency of the market in the first place. And as you mention, the externalities of stupid decisions often affect people that had nothing to do with them.

I just had this discussion with a finance friend of mine who liked to point his finger at the government for this bubble. While it may have had a hand in it, a lot of private wealth was lost buying assets that were marginal at best. That is what disturbs me. At the height of the bubble, the information was clearly available. In 2005, I was reading the Housing Bubble Blog on an almost daily basis. I saw the charts that were put together that described the history of housing prices tracked with inflation and compared to median income. It was obvious that there was a huge disconnect. I had no skin in the game, but even I could see it was a terrible risk and the system was being put in danger. If I can do this, why can't institutional investors or capital managers (by this point, most securities were being sold off to private investors)? My friend and I basically concluded that the actors were delusional, there was a huge principle-agent dilemma, or that the information wasn't as readily available as I believe.

But any of those reasons is enough to question the efficiency of the market. Once you start questioning people's ability to judge risk or make rational decisions, you really have to rethink your view on economics. This is why I'm much less concerned with the rational schools of economics like Chicago or Austrian, and more concerned with behavioral finance. People simply don't go around acting like little utility-maximizing automatons of rationality. And although I do believe in some form of economic punishment, is it really acceptable that the irrationality of major players can have devastating effects on those people who really weren't involved in the decisions to begin with? As a slightly separate observation, even free market models that assume rationality tell us that having players that have enough power or money to shift the markets single-handedly results in inefficiency. And we all suffer the externalities.

And the problem with examining jobs people shouldn't have had is realizing that the drop always overextends. Any market that I have ever looked at follows this behavior. There is panic and people overreact. Companies lay off more people than they really need to. Prices drop below what the underlying asset is really worth. This is another consequence of dealing with humans instead of rational actors. So while some people should not have been employed in the first place, there are many people who are the victims of overreaction. And those victims have less to spend and thus contribute to further deterioration.

I think the best we can do is to try and temper boom and bust cycles. I think they will always be present. Although many here dislike Keynes, this was all he was trying to do. He would raise taxes and interest rates while reducing spending during boom cycles and the opposite during bust. But Keynesian economics haven't been practiced in the US for a great number of years, as the government seems to be always trying to create the next boom. What we should've seen during the housing run up was lower spending, higher interest rates, and higher taxes, even if they were specifically aimed at reducing mobility in the housing sector. Instead we got more motivation to buy up the bubble. This is not Keynesian.

 

[ElFenix]

Hehe... Check your sarcasm meter. I was just being a smartass.

As far as the president controlling the economy, don't they appoint some of the people who do?

rothschilds appoint the president, not the other way around
:sneaky:

 

[Blackjack200]

Nonsense. The first rule of markets is that the all the information available has already been acted on. So it's the people trying to game the markets, regular investors thinking they know something that has not already been acted on, who are the suckers. And it is these suckers (and those who feed upon them) that cause every boom and bust cycle.

A hypothetical example: a stock (pick any) goes up based on factual information in the market. Some suckers see this as evidence that the stock is "hot" and will continue to go up. Their after-the-fact action in the market continues to drive the price up, over and above the fundamental reasons why it did so in the first place. Other see this as evidence of a "rally," and push it further to lofty heights. Champagne corks pop in celebration. Then, some decides to sell to pay for the champagne, the bubble deflates, and the stock returns, after some fluctuations, to a reasonable value based upon the actual factors supporting it. The suckers call this a bust, cry, and then promptly move on to the "hot ticket," the next bubble and the next fleecing.

Now, I'm not arguing against regulation per se, but has anyone ever stopped to consider some basic education and common sense first? Because... I'm sorry, but you're not victims... you're greedy and should know better.

This is efficient market theory and from what I understand, it's a broken theory. It requires information symmetry and rationional behavior, neither of which really exist in the markets.

We continue to use the theory because we don't have anything better.

As an interesting aside, we still use the Black-Scholes method to value stock options, even though the collapse of LTCM 12 years ago basically proved that it was not valid. Again, we don't have anything better.

 

[Lemon law]

I think everyone missed one of the prime causes, namely the unequal distribution of wealth and the total erosion of consumer buying power.

The 1920's was a decade in which productivity per man hour soared, but instead of equally distributing the gains, only a few benefited and pocketed the extra wealth as hourly wages remained stagnant. At the same time, farm land values soared while the value of farm crops dropped. And because the USA economy was far more agriculturally based then, having far too much farm land mortgaged to the hilt exposed a real economic danger and a ticking time bomb. Especially since it was a long term established tradition for banks to keep advancing small year by year loans payable after the fall crops came in rather than ever foreclosing.

Then came a series of small stock market crashes, until the final big one came on 10/29/1929, and it was crunch time. A nation over extended on credit finally had to cough up the money it had borrowed and could not repay. And with all the trade barriers all nations had erected, there was no domestic or international market to dump the goods business was still able to cheaply produce as the depression went world wide.

But the real cause was, big business had killed off the consumer, and as a result, big business had no outlet for the goods they produced. And with the poison already taken in with a decade of greed, big business had no effective answer. Following that were mass layoff, bank foreclosure on farmland, further reducing GDP and as consumer buying power dropped to near zero. And down and down it spiraled until 25% of the work force was unemployed. Meanwhile, government was initially doing all the wrong things, trying for a balanced budget when a deficit based budget would have stimulated the economy.

And when Obama was placed in a similar bind, he does not get any credit for keeping unemployment to only 10%.

 

[Munky]

Why isn't Bush an option?

Bwahahahaha.... now that made me laugh.

 

[Genx87]

I think everyone missed one of the prime causes, namely the unequal distribution of wealth and the total erosion of consumer buying power.

The 1920's was a decade in which productivity per man hour soared, but instead of equally distributing the gains, only a few benefited and pocketed the extra wealth as hourly wages remained stagnant. At the same time, farm land values soared while the value of farm crops dropped. And because the USA economy was far more agriculturally based then, having far too much farm land mortgaged to the hilt exposed a real economic danger and a ticking time bomb. Especially since it was a long term established tradition for banks to keep advancing small year by year loans payable after the fall crops came in rather than ever foreclosing.

Then came a series of small stock market crashes, until the final big one came on 10/29/1929, and it was crunch time. A nation over extended on credit finally had to cough up the money it had borrowed and could not repay. And with all the trade barriers all nations had erected, there was no domestic or international market to dump the goods business was still able to cheaply produce as the depression went world wide.

But the real cause was, big business had killed off the consumer, and as a result, big business had no outlet for the goods they produced. And with the poison already taken in with a decade of greed, big business had no effective answer. Following that were mass layoff, bank foreclosure on farmland, further reducing GDP and as consumer buying power dropped to near zero. And down and down it spiraled until 25% of the work force was unemployed. Meanwhile, government was initially doing all the wrong things, trying for a balanced budget when a deficit based budget would have stimulated the economy.

And when Obama was placed in a similar bind, he does not get any credit for keeping unemployment to only 10%.

You really need to read about the banking industry in the 20's before trying to pin this on stagnant wages or wealth distribution. They were basically selling avg Americans deposits to each other with the idea it would never go down. Eventually the market simply couldnt sustain the kind of speculating that was going on and it came crashing down taking avg america's deposits with it. With their savings wiped out so was the buying power and thus reduction in consumer spending meant layoffs. The banks that stayed out of the fray were hurt as well due to people demanding their deposits back which destroyed their liquidity and ability to do anything.

Also Hoovers reaction was anything but twiddling his thumbs. He psuhed through many reforms and created new agencies that FDR expanded on. He also pushed through infrastructure stimulus bills that FDR mocked in his campaign as wasteful. He was dumb in realizing delfation was the problem not inflation and he pushed to choke off the money supply. This is something we at least learned from on this most recent implosion. TARP saved us from another GD IMO. Now sadly we are awaiting the follow on regulation reform. I dont think it will happen.

 

[cwjerome]

If I had to break it down Barney Style I would go with a top five combination of (and basically in order):

1) many basic industries in serious trouble from producing too much (not on pace with wages)
2) major farm debt from improved efficiency and low food prices
3) consumers buying things on credit
4) stock market speculation then panic
5) banks collapse when people try and withdraw everything

= start of the Great Depression

EDIT: poll is retarded

 

[LegendKiller]

This is efficient market theory and from what I understand, it's a broken theory. It requires information symmetry and rationional behavior, neither of which really exist in the markets.

We continue to use the theory because we don't have anything better.

As an interesting aside, we still use the Black-Scholes method to value stock options, even though the collapse of LTCM 12 years ago basically proved that it was not valid. Again, we don't have anything better.

Your first point is pretty correct. There's no such thing as an "efficient market", even in the weak form. Efficient markets assume one basic premise...

the presence of information assumes it is assimilated and used logically by all market participants.


This single premise destroys EMH considering biases and emotions eliminate the ability of people to locally use the information.

This is also why Austrian economics fails. It doesn't take into account humanity.

As far as the Black-Scholes, it is but one method for valuing stock options. There are tons of models out there.

 

[jman19]

I'm shocked... a poster by the name "Anarchist420" who wishes he could fellate RP thinks the GD was due to *gasp* THE FED!

 

[DietDrThunder]

You're overlooking the major deception games that get played in each bubble that inevitably lead to the ensuing crash. That and the fact that the big money moves the market more than the little 'suckers' as you're pidgeon-holing them.

The stock market has always been a bit of a pyramid scheme as well, and the belief that its always about 'value' is a myth. What matters most is inevitably what the next price is going to be after one buys it. Buying begets buyers and selling begets sellers. The suckers are the ones that are too greedy to take profits, especially when the market is raging in their favor.

The stock market has been the only form of organized legalized gambling that is allowed in every nation around the world.

 

[Anarchist420]

I'm shocked... a poster by the name "Anarchist420" who wishes he could fellate RP thinks the GD was due to *gasp* THE FED!

lol, I'm not gay. But the Fed did cause the great depression. At the time, the fed didn't pump liquidity into many of the banks, largely because we were on the gold standard back then (doesn't go so hot with the 10% reserve lending), so the great depression happened.

I think the Smoot-Hawley tarriff may have been a secondary cause.

 

[Carmen813]

I'm not sure, but I think it has to do with some vacuum cleaner company.


/sarcasm off.

 

[zephyrprime]

It was (in no particular order):
1. excessive credit expansion made inevitable by fractional reserve banking system.
2. the easy money mentality that infected the nation
3. The Federal Reserve enabling greater monetary expansion.
4. the federal reserve preventing runs on small banks leading to a depression that was essentially a run on the entire country instead
5. lack of regulation of speculators letting margin buyers buy on 10-1 margin (now reduced to 2-1). Unfortunately, hedge funds and prop desks can still have 10-1 margin in 2010.

The great depression was exacerbated by:
1. Incorrect idea from congress that austerity measures where the correct response when instead they should have devalued the currency.
2. Smoot-Hawley Tarriff and like minded tariffs from other countries.
3. Foolish Keynesian New Deal programs which were band aids that injected liquidity while failing to address the fundamental problem of too much credit (in fact, they created more credit thus exacerbating the problem).
4. Dust bowl.

History has shown that if you devalue, you can typically recover in approximately 6 years. The US took longer than that although we'll never know how long it would have ultimately taken because WWII happened instead and forced the country back on its feet.

 

[LegendKiller]

lol, I'm not gay. But the Fed did cause the great depression. At the time, the fed didn't pump liquidity into many of the banks, largely because we were on the gold standard back then (doesn't go so hot with the 10% reserve lending), so the great depression happened.

I think the Smoot-Hawley tarriff may have been a secondary cause.

The GD was going to occur whether the Fed dropped rates and pumped in liquidity or not. They didn't keep rates the same because of the GS, they did it because nobody wanted to take the hit to the dollar.

 

[Munky]

If they had AT in the 1930's, there'd be a bunch of posters blaming it on "Bu... Bu... Bu... Bu.... Hoover!"

 

[totalnoob]

It was (in no particular order):
1. excessive credit expansion made inevitable by fractional reserve banking system.
2. the easy money mentality that infected the nation
3. The Federal Reserve enabling greater monetary expansion.
4. the federal reserve preventing runs on small banks leading to a depression that was essentially a run on the entire country instead
5. lack of regulation of speculators letting margin buyers buy on 10-1 margin (now reduced to 2-1). Unfortunately, hedge funds and prop desks can still have 10-1 margin in 2010.

The great depression was exacerbated by:
1. Incorrect idea from congress that austerity measures where the correct response when instead they should have devalued the currency.
2. Smoot-Hawley Tarriff and like minded tariffs from other countries.
3. Foolish Keynesian New Deal programs which were band aids that injected liquidity while failing to address the fundamental problem of too much credit (in fact, they created more credit thus exacerbating the problem).
4. Dust bowl.

History has shown that if you devalue, you can typically recover in approximately 6 years. The US took longer than that although we'll never know how long it would have ultimately taken because WWII happened instead and forced the country back on its feet.

Conspiracy theorist!!!!111eleven1!1

P.S. Everything you said is correct.

 

[Zebo]

Contraction of the money supply. I didn't even know there was debate on this after Friedman won a Nobel for his seminal work on it and pretty much every economist concurs.

Politicians had nothing to do with it. It was a Fed choice and strangled everything until WWII forced spending.

 

[Jhhnn]

Contraction of the money supply. I didn't even know there was debate on this after Friedman won a Nobel for his seminal work on it and pretty much every economist concurs.

Politicians had nothing to do with it. It was a Fed choice and strangled everything until WWII forced spending.

Mostly correct. That contraction was made possible, however, by the extreme over-extension of credit that led up to it.

Extension of credit is a form of speculation- the lender is speculating that that the borrower will repay the loan. Speculation, left unchecked, feeds on itself, creating economic bubbles and an inevitable over correction. The bubbles of the 1920's were in the stock market and an over supply of agricultural products.

Politicians were a part of the problem only in the sense that they supported Fed actions of the time. They really didn't have much choice because they didn't know what else to do.

 

[HannibalX]

Lack of transparency. The handful of people with all the information were gaming all the people who didn't.

And yet these people knowing they were out of the loop continued to put their money in banks they at the core knew nothing about.

Hmmm

 

[DougoMan]

Quote:
Originally Posted by Genx87
It was a perfect storm of not enough oversight, contraction of the money supply after the crash, protectionism, and govt intervention.
This. We made ourselves vulnerable to foreign interests (like today) and then when a recession came along we first went all clumsily protectionist and then went all big-government solutions. Hoover probably made it worse and FDR probably made it longer, both with the best of intentions.

Those are not really the big ones. Protectionism and govt. intervention were not causes but rather responses to the GD.

<<---- GD expert (ok not really but I am a history student that has taken classes on the period and read several thousand pages about it)

In my reading the most commonly agreed upon causes I have found are:

1. Technology and sick industries. In the decade preceding the GD industrial output doubled without employing any new workers. Industries that traditionally employed large numbers of workers like coal were being replaced by more mechanized industries like oil that required fewer workers.

2. Farming crises. Again largely because of technology (large scale pesticide based agriculture as we know it today was just taking off), farm output doubled and resulted in overproduction and huge decrease in prices putting farmers out of work. Also the dust bowl at this time put even more farmers out of work. Remember a large percentage of people were still farmers back then.

3. Distribution of income. It was the most uneven in our nations history, which did not work for a consumer economy since people could not afford to buy all the new stuff being made. Nobody was buying houses and all the consumer goods that go along with those purchases.

4. Speculation/Margin buying. Contrary to what people think the Stock Market crash was more a symptom than a cause of the GD. However it definitely made a bad situation worse and unsound lending practices were mostly to blame. Also people were putting all their money into stocks instead of investing in growth industries that employed workers.

Also as one teacher I had put it, "shit happens." That might be as good an explanation as any.


What is agreed upon is that FDR and the New Deal did not fix the depression much at all. It helped a little but by 1938 things were not looking that good. If it were not for WWII FDR would probably be looked upon as a failure.

 

[Craig234]

Also as one teacher I had put it, "shit happens." That might be as good an explanation as any.

No, it's not.

What is agreed upon is that FDR and the New Deal did not fix the depression much at all. It helped a little but by 1938 things were not looking that good. If it were not for WWII FDR would probably be looked upon as a failure.

No, it's not,

For someone who says they have studied it so much, not one mention of the creation of the SEC and new regulations, of lGass-Steagall, of the CCC and other employment programs, of anti-poverty measures, etc.

 

[DougoMan]

For someone who says they have studied it so much, not one mention of the creation of the SEC and new regulations, of lGass-Steagall, of the CCC and other employment programs, of anti-poverty measures, etc.

I thought we were discussing causes of the GD, not FDR and the New Deal.

Like I said, the New Deal "helped a little." It was just a short term fix, though.

Look what happened in '37-'38, the so called "Roosevelt Recession." FDR was under pressure to balance the budget and the economy was improving, so he cut funding to New Deal programs. Unemployment went through the roof, the stock market crashed - it was the beginning of the GD all over again.

Roosevelt reinstated them but the economy was not bouncing back quickly at all. These are the conditions Roosevelt would have left the office in 1940 if it were not for the war.


Short term though, sure, they helped a great deal. The Emergency Banking Act, FDIC, WPA, etc. at least stopped the bleeding and more importantly gave people some hope. And a lot of them are still around today, for better or worse.