"If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
Anna Schwartz co-authored with Milton Friedman the famous “A Monetary History of the United States” (1963), which all “Austrians” basically condemn for its analysis of the causes of the Great Depression.
She went further and said: “The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”
I don’t know how Ron Paul didn’t use this in his several exchanges with Ben Bernake at the House Financial Service Committee.
She didn’t quite retract their original analysis of the Great depression. She stuck by it, but claimed that that was then and this is now, and “They are getting it all wrong” now. I find this inconsistent, nevertheless, she seems to almost (but not quite) give an Austrian type analysis of the current situation. I was quite shocked.
Has any one heard of this? And perhaps someone can tell me why this was not used against Bernake when he kept bringing up this work by Anna and Milton as a basis to what he is doing?
I find it difficult to see how someone could at the same time call themselves an “Austrian” economist and agree with the Friedman/Schwarz analysis of the Great Depression. He and Schwarz argued that the Great Depression might have been avoided had the government not let the money supply contract - which is to deny that the economy was fundamentally imbalanced by previous malinvestment and required any real changes in order to return to health…
I wrote a blog post on exactly this subject back in January. I think it’s difficult to reconcile the Friedman/Schwartz position in that book with Austrian theory and you’d be hard pressed to find an Austrian that tries to do so. Having said that, DD commented on that blog post that Friedman was arguing for government taking a hands off approach to monetary policy, targeting flat yearly 2% increases in the money supply. If this were truely Friedman’s position then that might bring him much closer to the Austrian position - but only if by “money” Friedman means reserves rather than credit… So long as he adheres to a fractional reserve system, increasing the “money supply” would require injecting vast sums of new money into the system during times of crisis (such as now) when cash dissappears due to widespread defaults. Again, extremely difficult to reconcile such a recommendation with the Austrian position.
It does not have to be unavoidable to see that contraction can make the depression much deeper. Correction of malinvestments also can take place without a harmful collapse of money supply.
She is not an “Austrian” by any means, she is an old-school monetarist (which I still respect more than most other schools). Monetarists have some similar business cycle theories to the Austrians regarding easy credit fueling booms.
Anna J. Schwartz is simply pointing out that the current crisis is NOT a liquidity crisis like the one that occured in the early 1930s, instead, it is a crisis of banks having bad assets. Financial institutions had, and still have, more than enough liquidity, they simply won’t lend because other banks have too many questionable assets on their balance sheets. She is pointing out that this crisis cannot be solved through easier monetary policy because there is not a shortage of money, there is a shortage of good borrowers.
Shwartz is still an inflationista in the sense that she would support monetary expansion in the event of a real credit crunch like we saw during the 1930s. Austrians are opposed to this because they understand that this process is part of the market clearing itself of malinvestments. Schwartz, in fact, is a follower in a more sophisticated version of the debt-deflation theory.
You can find some info on monetarist business cycles here.