2. This is from LK, and it discusses open market operations in the early 20s. Remember this is a somewhat new approach. Before then, the Fed relied mainly on the discount rate which is the rate that it charges banks. After this point, it relied more exclusively on open market operations, which influence the federal funds rate, which is the rate that banks charge each other. LK's conclusion (and I agree) is that the Fed caused the 1920-21 recession to end the war-time inflation, and then the Fed ended the 1920-21 recession by taking its boot off the economy's neck. The whole affair was somewhat haphazard, of course.
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One of the things that I said in the RAE paper was that a profitable project for an Austrian would be to try to actually chart out changes in the capital structure associated with war-time monetary policy. Is this even in the cards? Will anyone take up that task? One would also think that you'd want to see a turn in the cycle emerging from the realization of entrepreneurs (particularly at the long end of the capital structure) that they don't have the resources that they thought they did. The former might be possible, but the latter seems very challenging to me in light of what we know what caused the break in inflation and the descent into depression. Any takers?
Regarding the timing of open market operations during the 1920-21 downturn, the recovery began in mid 1921. But open market operations didn't begin in earnest till January 1922, with the bulk of purchases in February and March. Open market operations weren't a widow's cruse. Also, you note that OMOs affect the federal funds rate, but there wasn't much of a federal funds market in 1921.
ReplyDeleteRight - didn't mean to confuse. The primary policy instrument at this time was definitely the discount rate.
DeleteA little context probably would have been helpful - a little while back Bob was asking whether or not the Fed response to the Depression as "unprecedented". This is one of a couple of posts LK has had since then about uses of OMOs during the 20s.
The switch to OMOs as the primary policy instrument emerged in part as a result of the Fed's experiences with the discount rate in 1920-21.
It was unprecedented in that the Fed was significantly limited in its ability to make government bonds purchases prior to February 1932. The Glass Steagall Act changed that all.
DeleteI touched on that on Bob's blog:
http://consultingbyrpm.com/blog/2012/09/does-anyone-deny-that-there-were-unprecedented-credit-stimulus-policies-during-hoover-administration.html#comment-45842
It was a rather typical post war recovery. Inflation fell because warring parties returned to agricultural production, industrial production shifted from war to consumer goods, and rebuilding investment began. Demobilization freed up a lot of resources from war for peacetime use. The Fed followed along.
ReplyDeleteI think I should have come up earlier in the discussion... like, after him and Tom Woods.
ReplyDeleteWow, no wonder you look up to Krugman--you guys have comparable egos. Daniel, the point of the post to rip Krugman's hypocrisy, not to give a history of thought on commentary on 1920-21. In my Mises Academy class I pointed people to your RAE paper.
It's not ego.
DeleteI said what you had him say in your dialogue, except earlier and more thoroughly.
I would have thought you'd like to see me minimize Krugman's contribution to our knowledge of the economy ;-)
It's not ego.
ReplyDeleteI said what you had him say in your dialogue, except earlier and more thoroughly.
Why would a post entitled "Krugman on the 1920s" focus on what Krugman has said rather than on Daniel Kuehn? After all, Kuehn has said the same things as Krugman, only better.
Ummm... because the real dispute is what Krugman said about the IMF report maybe?
DeleteI haven't said take the focus off Krugman!
Dan,
ReplyDeleteIf the real dispute is what Krugman said about the IMF report, and if, as you acknowledge, you don't know much about the British case, then why would you expect Bob to mention you at all, let alone to do so more prominently?
I'm really tiring of this Blackadder.
DeleteIf I had known you'd care so much about simply referencing one of the more prominent responses at the time that was actually directed at Bob and Tom Woods (unlike Krugman's) I would not have even included that sentence. Why are you making such a big deal over such a reasonable point?
I agree with both of you: Daniel is being silly for wanting me to feature him in a post outlining Krugmanian hypocrisy, and arguing with Blackadder can be very tiresome.
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