Comments on Bordo and
Landon-Lane
Stephen Broadberry
(University of Warwick)
Policy lessons from 1930s applied
during current crisis
•
•
•
•
•
BLL compare the 1930s and 2007/08 crises
through the prism of bank failures
End on pessimistic note, but perhaps too
pessimistic?
Nearly 80 years elapsed between the two crises
Policy response surely much more successful in
current crisis (at least so far) than in 1930s
Policy makers do seem to have learned the
important lessons of the 1930s, even if scholars
continue to debate the precise details
2
Policy lessons from 1930s applied
during current crisis
1. Fed prevented monetary contraction
(Friedman/Schwartz analysis)
2. Fed prevented credit markets seizing up
(Bernanke)
3. Fed bailed out insolvent banks
(Calomiris/Mason).
4. Expansionary fiscal policy adopted to prevent
collapse of real demand (Temin, Romer)
5. International co-operation perhaps imperfect,
but surely better than in 1930s (Eichengreen)
3
Links between variables in VAR
analysis and policy lessons
• Bank failures/suspensions due to illiquidity:
Friedman/Schwartz see bank failures as
“contagion of fear”
• Bank failures due to insolvency: White,
Calomiris & Mason emphasise insolvency e.g.
bank failures in agricultural regions in
response to declining agricultural prices
4
Variables and links to policy
• Money stock: Friedman & Schwartz criticise
Fed for allowing contraction of money stock
• Quality spread: Bernanke emphasises
importance of contraction of credit
• Change in unemployment (real aggregate
shocks): Temin, Romer emphasise collapse in
private consumption, which could have been
offset by expansionary fiscal policy
5
Explaining bank failures
• BLL focus on the issue of whether bank
failures were caused by illiquidity or
insolvency shocks
• Impulse response functions suggest illiquidity
shocks more important than insolvency shocks
in explaining bank failures/suspensions
6
BLL on bank failures
• Historical decompositions indicate that
illiquidity shocks more important in 1930 and
1931 crises, but insolvency shocks more
important in 1933
• This is exactly OPPOSITE conclusion to
Calomiris and Mason, who stress role of
insolvency in 1930 and 1931 but suggest a role
for illiquidity in 1933
7
BLL on bank failures
• BLL critical of micro studies on grounds that
cannot see common factors driving local
and regional bank failures, that may have
been national in scope
• But results of VAR analysis depend on
identifying assumptions. Most importantly,
illiquidity failure series is ordered before
insolvency failure series
8
BLL on bank failures
• Justification for this is that illiquidity shock can
cause contemporaneous failure of otherwise
solvent banks, but insolvency shock can cause
bank run only with a lag.
• But is this true with asymmetric information
and monthly data?
• Sensitivity analysis conducted for some
orderings, but not this one
9
Other results for total bank failures
• Money shocks mattered, as suggested by
Friedman & Schwartz, but not as much as
illiquidity or insolvency shocks
• Real aggregate shocks relatively unimportant
• Quality spread more important than real
aggregate shocks, but less important than
money shocks
10
Interpretation
• These interpretations are based on forecast
error decompositions for total bank failures.
• How about forecast error decomposition for
change in unemployment?
• Impulse response functions for change in
unemployment shown in appendix
• Seem to get bigger effect from insolvency
shocks than from illiquidity shocks
11