I just finished hearing a recording of John Kenneth Galbraith's The Great Crash for a book club. Not able to attend the meeting, I promised several people who asked what I thought about it that I would post some comments. Galbraith emphasizes the mass psychology of a stock bubbles, going back into history and examining the beginnings of the 1920's bubble. He is a bit inconsistent, spending some time early in the book explaining why the Federal Reserve followed an easy money policy, but later dismissing that policy as a reason for the boom and consequent bust. We are left with mass psychology and almost fraudulent optimism as an explanation for the boom - people didn't want to miss the chance to get rich quick. Galbraith goes into great detail, month by month and day by day in late 1929, to trace the history in an ironically mocking style.
In the end, the story reduces to mass psychology combined with minimal regulation and oversight. Since then the United States has gone through cycles of regulation and deregulation, along with a few more bubbles and consequent busts - for example, the dot.com boom and the recent housing boom. The contrast between the present and the 1930's depression is that, despite the severity of the current recession, it has been ameliorated by permanent programs and current policies. The opposite situaiton prevailed in the 1930's. Deposit insurance and unemployment compensation prevent bank runs and maintain consumer spending to some degree. Federal Reserve policies to make loans available to encourage businesses to invest and hire and the stimulus package are in stark contrast to the policies of the 1930's that exacerbated the downturn.
However, human nature and the consequent mass psychology are not going to change so it is likely that there will be more bubbles based on the idea that, "Conditions are different this time." Regulators, like generals, may have a tendency to plan for the last war, rather than for unexpected new problems, such as the mortgage backed securities created outside the regulated banking system in the recent boom and bust.
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Regulators are a necessary half-measure. They can never prevent bubbles because they have neither the incentive to create new profit schemes nor the capacity to foresee them. They can issue rules that at least prevent exact recurrences of past debacles. It's a delicate task because our free-market created wealth depends on innovation with prospects for outsize profit. We can also never create a perfect regulatory scheme because our politics oscillates between free-market and market control philosophies such that we are unlikely to have a sensible long-term approach to regulation. We could take some of the politics out of it by having term appointments for tenure longer than the tenure of any president. Otherwise we have to suffer the cycles of innovation-bubble-crash followed second-guessing and hand-wringing by the rear-view Congress.
ReplyDeleteFederal Reserve Board of governors appointments are for 14 years. A Governor is chairman for four years, not coinciding with a presidential term.
ReplyDeleteYes, the Fed and a few others have long term appointments. I was thinking of the current debate over hypothetical new regulator(s), including the proposed move to strip the Fed of some of its autonomy. Politicians have a hard time keeping their hands off the machine's knobs.
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