by Charles Kindleberger v. Bernanke In the papers of economist Charles Kindleberger, Perry Mehrling has found some interesting notes on the paper that won Ben Bernanke his ‘Nobel Prize’ in economics this year: Dear Dr. Bernanke, Thank you for sending me your paper on the great depression. You ask for comments, and I assume this is not merely ceremonial. I am afraid you will not in fact welcome them. I think you have provided a most ingenious solution to a non-problem.The necessity to demonstrate that financial crisis can be deleterious to production arises only in the scholastic precincts of the Chicago school with what Reder called in the last JEL its tight priors, or TP. If one believes in rational expectations, a natural rate of unemployment, efficient
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Charles Kindleberger v. Bernanke
In the papers of economist Charles Kindleberger, Perry Mehrling has found some interesting notes on the paper that won Ben Bernanke his ‘Nobel Prize’ in economics this year:
Dear Dr. Bernanke,
Thank you for sending me your paper on the great depression. You ask for comments, and I assume this is not merely ceremonial. I am afraid you will not in fact welcome them.
I think you have provided a most ingenious solution to a non-problem.The necessity to demonstrate that financial crisis can be deleterious to production arises only in the scholastic precincts of the Chicago school with what Reder called in the last JEL its tight priors, or TP. If one believes in rational expectations, a natural rate of unemployment, efficient markets, exchange rates continuously at purchasing power parities, there is not much that can be explained about business cycles or financial crises. For a Chicagoan, you are courageous to depart from the assumption of complete markets.
You wave away Minsky and me for departing from rational assumptions. Would you not accept that it is possible for each participant in a market to be rational but for the market as a whole to be irrational because of the fallacy of composition? If not, how can you explain chain letters, betting on lotteries, panics in burning theatres, stock market and commodity bubbles as the Hunts in silver, the world in gold, etc …
Your rejection of money illusion (on the ground of rationality) throws out any role for price changes. I think this is a mistake on account at least of lags and dynamics. No one of the Chicago stripe pays attention to the sharp drop in commodity prices in the last quarter of 1929, caused by the banks, in their concern over loans on securities, to finance commodities sold in New York on consignment (and auto loans). This put the pressure on banks in areas with loans on commodities. The gainers from the price declines were slow in realizing their increases. The banks of the losers failed. Those of the ultimate winners did not expand …
In The World in Depression, 1929-1939, which you do not list, I make much of this structural deflation, the mirror analogue of structural inflation today from core inflation and the oil shock. But your priors do not permit you to think them of any importance.
Sincerely yours,
Charles P. Kindleberger