20 January 2009

Benanke Has it all wrong and is repeating the past

In the entire volume (Bernanke, ‘Essays on Great Depression', 2000, Princeton) there is a single refence to Minsky in Part Two, page 43 - “Hyman Minsky (1977) and Carles Kindleberger (1978) have … argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behaviour.” A footnote adds - “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

That is to say, don't mess with my neo-classical assumptions, dood.

Indeed! Having not properly comprehended the best contemporary explanation of the Great Depression, and dismissed the best modern explanation because it didn't make an assumption that neoclassical economists insist upon, Bernanke is now trapped repeating history (incidentally, this comment by Bernanke also gives the lie to the “assumptions don't matter, it's only the results that count” nonsense that Friedman dished up as neoclassical economic methodology–neoclassical economists in fact care desperately about their assumptions and are willing to dismiss rival theories simply because they don't make the same assumptions, regardless of how accurate they are). It is painfully obvious that the real cause of this current financial crisis was the excessive build-up of debt during preceding speculative manias dating back to the mid-1980s. The real danger now is that, on top of this debt mountain, we are starting to experience the slippery slope of falling prices.

In other words, the cause of our current financial crisis is debt combined with deflation–precisely the forces that Irving Fisher described as the causes of the Great Depression back in 1933.


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