Galbraith Must be Right–Jim Cramer Says So!
November 19, 2009
Don’t we all, as historians, love to engage in but-for analysis? The causes of X event are certainly Y. I work a lot on Cold War history, and the debate never ceases over what caused the Cold War (obviously, the causes were all economic, as William Appleman Williams would argue, were he around to do so). This week’s readings focus on why did it happen with regard to bank runs and the 1929 Crash.
The O’Grada (sorry, could not figure out how to properly punctuate his name) and White paper engages in micro-economic analysis of the 1854/57 bank runs, utlizing a robust set of data from the EISB. Robust, in the sense that it is extant, but troubling, in that it is such a limited sample set, particularly for the nation-wide 1857 panic. There seems to me to be an overconfidence in the economics. I am a big fan of this methodology, but I don’t think this is the best execution. One could easily question whether the variables are sufficient/correct. Interesting as a methodological piece, but I am not sure that it provides real answers. More interesting than the econometrics is the chart of deposits/withdrawals, and the growth charts presented early in the paper.
Mark Carlson is to be commended for supplying a thorough review of the literature. He articulately lays out the two competing strands of thought–illiquidity v. asymmetrical information, adds a “hybrid” category, and then does some base level analyses. Carlson’s paper is well-written, lucid, and informative, but his conclusions are (justifiably?) tentative.
Galbraith is a masterful writer. He tells a good tale and argues coherently. But, I take issue on two points. First, I think he may overstate the role of income disparity as a driving force behind the bubble and crash. That is simply a fact of the contemporary market, and has not changed in 80 years. It may be a symptom, but I think Galbraith goes too far it painting it as causal. Second, Galbraith disparages the role of “economic intelligence” during the bubble, and castigates economists as making things worse. Maybe so. But is it realistic to expect economists to be able to accurately model–if they model too pessimisticly, we deride them as harbingers of doom, and if too optimistically, Pollyannas. Perhaps the level of sophistication among those listening to the pundits at the time made them too susceptible to influence, a phenomena not unfamiliar to us today.
But, speaking of pundits (smooth segue, eh?), Galbraith is unquestionably the greatest pundit of them all! Not just because he acknowledged that another bubble might come along some day (his prognostications were a bit wishy-washy in my view), but because that Great Financial Wizard, MR. JIM CRAMER (typing in ALLCAPS to simulate his inimitable style SAYS SO!!
Tom, better late than never I suppose. I was thumbing around to see who might have recovered from the turkey and found this piece you put up last Thursday.
I for one think the disparity in the income distribution explains NOTHING. The disparity has always existed, ALWYS. Something that is a constant cannot be used to explain change. As we do not appear to be living in a constant state of bubbling over, one has to ask, which particular circumstance(s) led to the crash of 1929.
One theory put forth by a friend of mine has to do with the immigration laws. Charlie reckons that the changes introduced in 1924 and 1925 played a role in shrinking the labor force, at least the cheap malleable labor force.
This might seem far fetched, however, what if the tightening of the immigration laws was not a cause, but a symptom. Perhaps some underlying fear crept into the national psyche, and the new immigration laws. the crash and the subsequent Depression resulted from a lack of faith. How could you ever measure this?
Don’t know, but I think we have not uncovered the cause of the Depression this semester.
The conditions Bill outlined last week when he gave his presentation might be necessary but are they sufficient? I think not.