Tyler Cowen: belief

Transcript context

…This, to me, is so interesting, and I so want to hear what you think about this. I actually was thinking about you at one point when I was writing this book, because if you go back and read the diaries of some of the board members of the Fed during this period, two things became apparent. One is they were scarred by what they did in 1920–21 because they had raised interest rates, and they had been blamed for effectively upending the market and the economy briefly. Of course, it came back, actually, quite quickly. They were so new. The Fed had just been created in 1913. They used to sometimes call it an “experiment.” It was still an experiment to some of them, that I think that they were very anxious about the political ramifications. Benjamin Strong, who was no longer alive by 1929 — he passed away in 1928 — he used to write back in 1925 about the possibility of them getting hauled up in front of Congress and what that would mean if they did something that effectively turned the economy over. So, here we are in the spring of 1929. They know that speculation is getting out of control. They desperately want to tamp it down. There’s a battle going on about whether to raise interest rates and by how much, but to the extent that they were talking about that, the view, I think, was that they would have to raise them so much that they had almost pretty much convinced themselves that to really tamp speculation down, you have to raise interest rates so much that you, by default, would tip the economy, and they didn’t have the courage to do that. If I had been alive back then, I would have agreed with those people, correctly or not. I think that’s a pretty good argument. The notion that 1920 to ’21 saw such a quick recovery — again, one would have been wrong, but the rational thing to have expected would be, once again, the same. It’s like, “Oh, let this crash, whatever. We’ll come back in a year or two.” Now, ex post, you can always say exactly how it should have gone, but ex ante, that would have been my reasoning. That may be, but I think there’re always two issues in a crisis. It’s can you prevent the crisis on the front end? And then what do you do once you’re in a crisis on the back end? It’s interesting that not only did they not choose to try to do something to prevent it, demonstrably, on the front end, and maybe you would have been very rational to have chosen not to do anything. But on the back end, when there was a debate about could you lower interest rates, flood the system with money? Obviously, the gold standard comes into play there and becomes very complicated, but there were obviously discussions about moving off of that, and that would have ultimately been the right thing to do, and probably would have been the right thing to do earlier than they did. For the most part, they sat on their hands. The good news is Ben Bernanke, I think, learned a lot of these lessons when he was doing his PhD at Princeton and took some of those lessons into the 2008 financial crisis, where he did decide to flood the system with money. While politically, it might have been a problem insofar as there were a lot of questions about bailouts and what the Fed did in that context, I think on a practical economic basis, it worked.…

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