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Book Review: The Forgotten Depression–1921: The Crash That Cured Itself

November 1, 2014 in Economics

By Lawrence H. White

Lawrence H. White

The Forgotten Depression—1921: The Crash That Cured Itself
By James Grant
Simon & Schuster, $120.97, 272 pages

You might think that a book about a business cycle couldn’t be a page-turner, but think again. James Grant, of the long-running biweekly Grant’s Interest Rate Observer (and before that, a Barron’s columnist), turns “America’s last governmentally unmedicated depression” of 1920-21 into a riveting and instructive tale.

Grant crafts a drama that features major players in business and government on a stage built from the solid timbers of economic theory and statistics. But as he reveals in the preface, “The hero of my narrative is the price mechanism, Adam Smith’s invisible hand.”

Although not quite the forgotten downturn of the author’s title, the depression of 1920-21 has not received the scrutiny it deserves. The instructive lesson of the story is that the federal government “met the downturn by seeming to ignore it—or by implementing policies that an average 21st century economist would judge disastrous”—and the hands-off approach actually worked.

Prices were allowed to fall rapidly—14% a year by one measure—between June 1920 and December 1921, faster than they would at the start of the Great Depression. Yet, real output contracted much less in the earlier downturn, followed by a “powerful, job-filled recovery.”

That belies the common view, practically a mantra for former Fed Chairman Ben Bernanke, that falling prices are a source of trouble. It supports instead a less-fashionable perspective, long advanced by the economist Leland Yeager, that once aggregate demand has fallen, faster downward price adjustment reduces the loss of real output. In other words, falling prices are not a calamity, but a cure.

As Grant explains, economic policy in 1920 became “laissez faire by accident.” President Woodrow Wilson did not order federal anti-recession measures because he had been felled by a stroke. Benjamin Strong, the influential head of the Federal Reserve Bank of New York, believed that tightened monetary policy was needed to put the economy back on a sound footing after the orgy of finance to underwrite the Great War that had ended two years before.

Warren G. Harding, who followed Wilson as president in March 1921, was committed to a “return to normalcy” after unprecedented wartime inflation and borrowing. As Grant observes, Harding was a “candidate of disposition rather than ideas. Conciliatory, handsome, humble, tranquil, evidently ordinary—above all, ‘normal’—he was the antidote to the larger-than-life figures who had recently filled the White …read more

Source: OP-EDS

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Real-estate Out of Reach of the Super Wealthy

November 1, 2014 in Economics

By David Howden

The housing boom is searching for ways to keep going. Prices for many high-end pieces of real estate are now out of reach for even the 1% of the super-wealthy.

During the last housing boom, terms were reset for the “little people” to make home ownership an attractive financial option. Mortgage maturities extended, down payments dropped, and of course every knows by now about the role that all-time low interest rates played in attracting people to debt-fueled spending.

Now we see similar changes taking place in the top-end of the real-estate market .

Consider this apartment recently listed in New York City. With rent set at $500,000 per month (!), it beats the previous record holder located at the Palace Hotel at 455 Madison Ave., which only rents for half that much.

Why pay $6 million a year to rent an apartment? (Or better still, who would do such a thing?)

Partly the answer lies in considering what it would take to purchase it. With rents this high, the selling price of this palatial pad would be around the $100 million mark. For even the super-rich, this is a bit of a stretch.

In many ways this current housing boom is constrained to the upper echelons of wealth. Now it seems as though even they might be finding prices  a little tough to swallow.

(Cross posted at Mises Canada.)

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