In the panel discussion "The Crisis and How to Deal with It" Nouriel Roubini gave a good summary of how the stock market crash of 1929 turned into the Great Depression of 1933. Over the following four years government policy exacerbated the problems.
The four causes were:
- " ..we didn't believe in a counter-cyclical monetary policy. The money supply contracted rather than being eased. Interest rates were not falling, and that made the credit crunch worse."
- "nobody believed in counter-cyclical fiscal policy. The general theory of Keynes was written only in 1936; in the early 1930s, the government was raising taxes and cutting spending in order to maintain a balanced budget. That made the recession even more severe."
- "there was a belief that banks should be allowed to collapse. Thousands of them collapsed, the credit crunch became even worse."
- "by 1933, 75 percent of households had defaulted on their mortgages; they couldn't pay them. So a stock market crash became a Great Depression."
Roubini concludes with other elements "add currency wars internationally, trade wars, protectionism, and capital controls; then you had default by countries and the rise of totalitarian regimens in Germany and in Italy, in Japan, and Spain" and the consequences of using the wrong policy prescription - "World War II"
Posts
