Recent comments by Ludwig van den Hauwe

• Hopeless Unemployment

  I can see that the business cycle perspective is only one lens through which one can look at these matters but one supposition of the business cycle lens seems to be (to me at least) that with the disappearance of the business cycle a source of at least some of the unemployment would disappear too... This being said the Great Depression episode goes on to present some interesting puzzles to economists. The "aggregate demand puzzle" is usually thought to have been solved by the gold standard theory: aggregate demand was depressed by a largely unplanned monetary contraction, which was transmitted around the world by the gold standard. But what were the relevant differences between the classical and interwar gold standards that support the case against the gold standard as the source of deflation and depression? And the gold standard theory still leaves unsolved the corresponding "aggregate supply puzzle". Slowly adjusting nominal wages apparently helped propagate monetary shocks in the Depression, but why did wages not adjust more quickly in the interwar period?

• Europe’s Summer Reading List

  It may be worthwhile to pursue the theme of possible parallels and differences between the Great Contraction episode and the recent financial crisis. Friedman and Schwartz expressed a high level of confidence in the powers of central banking: "Throughout the contraction, the System had ample powers to cut short the tragic process of monetary deflation and banking collapse." (p. 11) They also emphasized the role of strong personal leadership. "If Strong had still been alive..." (p. 412) According to at least one alternative interpretation, which is not incompatible with the monetarist explanation, the Fed was also responsible, from 1922 to 1928, for having set the stage for a boom-bust cycle by drastically expanding the money supply in fear of deflation; from this perspective both episodes present rather neat instances of an almost classic cycle. But after that a host of policy missteps prevented markets from adjusting to changing circumstances, accounting for the unusual depth and length of the Great Depression. And certainly an element of paradox resides in claiming government stimulus programs as the appropriate solution to the very disorder that prior intervention has created.

• Better than Basel

  One can always say, in retrospect, that a bank that runs through its usable capital cushion was overleveraged, but one of the mysteries with respect to the financial crisis is that the banks, even when they were accumulating relatively low-yielding PLMBS/CDOs because of the capital relief they offered under Basel I and the Recourse Rule, apparently weren´t using this capital relief to increase their leverage, which remained steady (in the aggregate) during the years before the crisis. One possible answer is that banks, by using capital arbitrage to obtain capital relief, were expanding their "extra" prudential capital cushion by lowering the legally mandated capital floor (keeping their leverage levels steady) since capital devoted to the extra cushion is necessary in the face of an unpredictable future, while capital devoted to the legal cushion is wasted, or at least, its buffer function is limited. And of course the ultimate causes of the crisis lie deeper; as long as the financial and monetary sectors are organized along collectivist planning principles, there will be crises and recessions...

• Re-Capturing the Friedmans

  Sorry -- of course it is "Anna J. Schwartz".

• Friedman Completed Keynes

  Interesting article. In the terms of Axel Leijonhufvud´s grouping of theories as either "saving-investment theories" or "quantity theory" Keynes and Friedman both qualify as quantity theorists, despite Leijonhufvud´s own attempt to make Keynes out to be a Wicksellian. An alternative distinction can be based on alternative levels of aggregation of macroeconomic theorizing in the spirit of Hayek´s critique of Keynes, but this viewpoint goes on to be neglected by mainstream theorizing. Both Keynes and Friedman neglected the effects of changes in the interest rate on the economy´s structure of capital; this is the Wicksellian theme according to which there can be a temporary but significant discrepancy between the bank rate and the natural rate of interest. On the other hand interpreting Keynes has long been and still remains open to controversy. Post-Keynesians in the style of Minsky would almost certainly object against categorizing Keynes as a quantity theorist...