Benn Steil, giving a lecture upon receiving the 2010 Hayek Award from the Manhattan Institute, says that QE2 and other monetary interventions are leading to a replay of the monetary mischief of the 1920s and 1930s. Steil and Manuel Hinds won the Hayek award for their book, Money, Markets, and Sovereignty. Here’s snippet of Steil’s lecture:
Everyone today knows about the stock market boom and subsequent crash in 1929. But few are aware of just how pervasive the credit bubble was. From 1997-2007 we witnessed here in the
“a constructional boom of previously unheard-of dimensions. A real estate boom developed, first in United States , but soon was transferred to the urban real estate market on a nation-wide scale.” But I actually took this quote from a book written in 1937, by three economists writing about the mid-1920s. Florida
There was also a critical international dimension to the American credit bubble and crash which has precise parallels today.
Consider first how the
United Statesand China would interact under a classical gold standard. If the United Statessent a dollar to China, would have to redeem that dollar for American gold. A fall in the China U.S.gold stock would necessitate a rise in interest rates, which would reduce credit growth, reduce prices, and reduce the trade deficit. This is the mechanism by which the gold standard automatically corrected global imbalances. U.S.
Compare this with today’s actual monetary structure. When the
United Statessends a dollar to China, immediately returns it in the form of a low-interest-rate loan. That dollar is then recycled through the China financial system, causing further credit growth and, critically, no countervailing Federal Reserve action. U.S.
The bubbles and imbalances that have marked the past decade—as they did the 1920s—are features of a monetary regime which operates in precisely the opposite fashion as the one which operated during the great globalization of the late nineteenth century.
is not, as Fed chairman Ben Bernanke would have it, a passive victim of “a global savings glut.” It should not, therefore, be surprising that bubbles will continue to emerge in one asset market after another, and will continue to burst with damaging consequences. America