The NYT on historical Stimulus Programs.

[Surlethe]

You mean generally agreed upon by Keynesians & Freidman-ites, yes? In his book Competition and monopoly in the Federal Reserve System, 1914-1951 as well as his 1989 research paper on the effectiveness of the Fed's open market operations, professor Mark Toma argues that the Fed's policies had very little effect on the money supply. This is supported by the St. Louis Fed's monetary base statistics, the monetary base fell a mere 1.7% from the beginning of 1928 to the end of 1929.

You can't ignore multipliers and the effect on interest rates - depending on the elasticity of money demand, a 1.7% monetary base decrease can have much larger effects on the interest rate, which in turn has compounded effects on aggregate demand. For instance, according to The Great Depression (Hall & Ferguson), the Fed also raised the discount rate from 3.5% to 5% at all banks. 1928-9 monetary policy was highly contractionary, even if the money supply fell by a "mere" 1.7%.

Interestingly, what prompted the Fed to pursue this policy was member banks using Fed funds to speculate in the stock market. So, basically, they shut off the tap, which put the brakes on the economy.

If I knew the complete answer I'd have a Nobel prize. But one of the key pieces in the puzzle is interest rates, for instance "easy Al" Greenspan and "helicopter" Ben have thus far managed to keep interest rates near zero as has the Bank of Japan for the past 15-20 years, this has enabled us to carry greater amounts of debt in relation to GDP. For example, at an interest rate of 1%, you can take out a 20 year mortgage that's over twice as large as one with the same term where the interest rate is 10%. And the same is true if you're a company or nation selling bonds, lower rates translates to an ability to float more bonds issues, and hence a greater amount of debt. Same with credit cards, car loans, lines of credit and so forth.

So here's a way to test your hypothesis: in every recession, do interest rates and the debt:GDP ratio behave as expected? Interestingly, the Fed controls the bond markets indirectly through the money supply: the way the quantity of money demanded and interest rates adjust to shifts in the money supply is by people moving funds to and from securities and bonds.

I think we're looking at two sides of the same coin, the dislocation was a reaction to market conditions and it's also a positive feedback mechanism which made the depression great and lasting. The bond market doesn't dislocate by itself for no reason, but if it does let go will take down everything else with it by driving lending costs through the roof and freezing the flow of credit.

Quite possibly. I am taking issue with the notion of the debt:GDP ratio as the root cause of the business cycle, not with the idea of the bond market reacting to economic conditions and exacerbating downturns.

[Darth Wong]

Oh for fuck's sake, do we really need to spell out that the stimulus is not really supposed to create a net boost to the economy? It is supposed to cushion the blow of the crash, by limiting the individual hardships suffered by the citizens and communities which would otherwise be virtually demolished.

But yeah, I suppose that if you completely disregard the question of individual suffering and just look at the economy as a large machine whose output you're trying to maximize over time, the correct solution is to just to let it all burn and then build it better next time. Congratulations.

[J]

I'll cover Surlethe's points sometime tomorrow, in the meantime...

Oh for fuck's sake, do we really need to spell out that the stimulus is not really supposed to create a net boost to the economy? It is supposed to cushion the blow of the crash, by limiting the individual hardships suffered by the citizens and communities which would otherwise be virtually demolished.

I've maintained from the very beginning that any stimulus spending should be used to fund social support programs and infrastructure & projects which improve the lives & productivity of the people. We need to help the people get back on their feet and rebuild a simpler more robust system.

Of course we went about it completely backwards, almost everything done to date has taken away from citizens & communities, leaving them more impoverished than before and transferring what remains of their meager assets to the compulsive gamblers on Wall Street. All hail trickle-down.

[Ziggy Stardust]

Of course we went about it completely backwards, almost everything done to date has taken away from citizens & communities, leaving them more impoverished than before and transferring what remains of their meager assets to the compulsive gamblers on Wall Street. All hail trickle-down.

Wait, are you talking about the current stimulus bill or a historic incident? Because I don't think there is any evidence to support the claim that the current stimulus bill has made citizens and communities more impoverished than before. Frankly, considering the walloping our economy has taken, the bulk of citizens and communities in this country are amazingly well off.

[ray245]

Of course we went about it completely backwards, almost everything done to date has taken away from citizens & communities, leaving them more impoverished than before and transferring what remains of their meager assets to the compulsive gamblers on Wall Street. All hail trickle-down.

Wait, are you talking about the current stimulus bill or a historic incident? Because I don't think there is any evidence to support the claim that the current stimulus bill has made citizens and communities more impoverished than before. Frankly, considering the walloping our economy has taken, the bulk of citizens and communities in this country are amazingly well off.

Maybe it is due to the fact that people's savings are not wiped out due to the collapse of banks? At the very least, the government is doing something to prevent the fall of one economic sector after another.

[J]

So here's a way to test your hypothesis: in every recession, do interest rates and the debt:GDP ratio behave as expected?

If my hypothesis is correct, then we should see an increase in short-term interest rates leading up to all recessions, specifically, the 3-month to 5 year range of Treasuries from which commercial papers, credit cards, car loans, and most business loans are indexed. There should also be a downward trend starting around 1980 which is when the debt:GDP ratio starts blowing out.

3 month
1 year
3 year
5 year

And that is indeed what we have.

Interestingly, the Fed controls the bond markets indirectly through the money supply: the way the quantity of money demanded and interest rates adjust to shifts in the money supply is by people moving funds to and from securities and bonds

I'm not sure if it's accurate to say the Fed has indirect control of the bond market through the money supply, if this is true then the bond market should've dislocated entirely last fall when the Fed decided to double its monetary base. I'd say it's the government which has indirect control through how much of a deficit it chooses to run and hence how much debt needs to be sold on the bond market.

Wait, are you talking about the current stimulus bill or a historic incident? Because I don't think there is any evidence to support the claim that the current stimulus bill has made citizens and communities more impoverished than before. Frankly, considering the walloping our economy has taken, the bulk of citizens and communities in this country are amazingly well off.

The current one. Municipal bond issues have been destroyed by the bailout package guarantees and the federal government's own debt issues crowding out the market. This also affects bond issues from hospitals, port authorities, and other parties which depend on affordable debt sales to fund their daily operations. The bond failures make it a lot more expensive for them to secure funding, and some of them are going under. For instance, municipalities & hospitals will have to reduce services, putting even more pressure on citizens.