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Joseph Schumpeter was a very famous Moravian-born (Czech), Austrian-educated, American Nobel economist (Harvard University, 1932–50, until death) who had the fresh and real-time knowledge of the period preceding and during the Great Depression. Some, including myself, consider him as the greatest American economist. It is my belief that his descriptive commentaries relating to the Great Depression (that easily lead to where the finger should be pointed) have been willfully ignored. When we compare the 1920s and 1930s to the 1990s and 2000s the sequence of important economic events might not be the same even if the general dynamics, as dictated by long-term cycles, are very similar. For example, the real estate bubble preceded the stock market bubble in the former period. If we take the two booms in each period together, regardless of their order, the period 1996-2005 is similar to the 1923-29 period. Again, the length of the period does not have to be exactly the same. What are remarkably similar are the economic behavior of the public and the various promoters, including the bankers, builders, retailers, corporations, Wall Street, etc. It is not possible to cover everything that Schumpeter said on the said behavior, so I will limit to few important examples with quotes, from Business Cycles, and let you conclude if they sound only too familiar. Emphasis in all capitals is mine. “It seemed more important to get the home one wanted …then to bother whether it would cost few thousands more [few 100Ks more in California in the past years] or less, provided that the money was readily forthcoming. And it was [!!]. First mortgages on urban real estate …also financed not only other types of building but other things than building. …The increase [in bank credit] …illustrates well how a cheap money policy may affect other sectors than those in which it is conspicuously successful in bringing down rates.” “…But the conclusion that this essentially consequential development …[resulted] in overbuilding, owing to the additional stimulus imparted by the monetary factor, must not be accepted hastily, however plausible it may seem [one example of why Schumpeter thought that people are very eager to point to the Monetary Policy]. Some types of responses to those conditions, especially those that were linked to the speculative real estate operations, were clearly of bubble class [i.e., it was the bubble mentality and not the easy Monetary Policy that caused the overbuilding]. “…Finally, EVERYTHING WAS DONE TO MAKE IT EASY FOR EVERYONE TO RUN INTO DEBT, FOR THE PURPOSE OF BUILDING A HOME AS FOR ANY OTHER PURPOSE.” “…In other words, we shall readily understand why THE LOAD OF DEBT SO LIGHTHEARTEDLY INCURRED BY PEOPLE WHO FORESAW NOTHING BUT BOOMS SHOULD BECOME A SERIOUS MATTER whenever incomes fell, and that construction would then CONTRIBUTE, directly and through the effects on the credit structure of IMPAIRED VALUES [read falling prices] OF REAL ESTATE, AS MUCH TO A DEPRESSION AS IT HAD CONTRIBUTED TO THE PRECEDING BOOMS.” The bottom line is that bubbles, or booms, have a mind of their own. Right conditions, psychological as well as economic, for booms don’t exist at all times. We have had real estate booms in the US when the Monetary Policy was not what one would call easy money. In 1993, when the Monetary Policy was very easy, and the mortgage rates came down substantially, there was not only no boom in Southern California housing, but rather a bust. Most importantly, depressions happen as a result of too much debt incurred by households, and sometimes by businesses, during the booms. Hence, the only way to avoid depressions is to check the booms, or the level of debt that leads to the booms, in the first place, something that Dr. Bernanke does not believe in. One habit that I have formed is to re-read important works periodically (I re-read Adam Smith, Schumpeter, Tocqueville, etc., and the US Constitution, at least parts of them, once or more every year) because it is not possible to remember many important ideas, or facts. When I read Schumpeter in late 1990s I didn’t pay much attention to real estate’s contribution to the Great Depression. I was too focused on the stock market. Also, I didn’t grasp the role of the bankers, who behaved worse than the used car salesmen in pushing, or promoting, debt in turning what would have been a normal recession, otherwise, into a depression. Schumpeter goes at length to impress that bankers need to be independent agents. But, he says that the temptation has been for bankers to control businesses and industries and for those who control businesses and industries to control banks. The situation that exists today, at least in the US, the bankers, financiers, and other businesses are all fully intertwined, i.e. anything but independent. If the real estate industry requires loose lending standards to boom, or extend the boom, as is the case now, bankers are more than happy to comply. He talks about "the intellectual and moral qualities not present in all people who take to the banking profession.” There are very few people these days that talk about the moral qualities of bankers, or any other economic ruling elite. Then he goes on to explain the bankers’ role in creating economic turmoil: “One of the results of our historical sketch will, in fact, be that FAILURE OF THE BANKING COMMUNITY to function in the way required by the structure of the capitalistic machine ACCOUNTS FOR MOST OF THE EVENTS WHICH THE MAJORITY OF THE OBSERVERS WOULD CALL ‘CATASTROPHES.’” There is a reason why I refer to the big bankers of New York City as Bankrupters because their actions are certain to lead to future bankruptcies of tens of millions of American households. Not only these people lack moral qualities, they are born-and-bred financial bloodsuckers. When I see Sandy Weill on TV, I see Dracula! Mr. Weill recently claimed, “The balance sheets of the American consumer are exceedingly strong.” Talk about deception and lies, the tools of the trade for America’s biggest bankers and financiers. Mr. Weill seems bloodthirsty to suck the financial blood of few more millions of American households while he still has the opportunity to do it with impunity. Evil can exist in many forms and among ignorant people it can thrive. There is hardly any dispute that the so-called educated Americans are ignorant of history. An important historical knowledge that is lost to Americans is that the stock market is a substitute debt market and high enough dividends were the single best check on the Corporate Crooks. In summary, if one reads the lively commentaries of Schumpeter regarding the 1920s it is clear that it was the certain conduct on the parts of bankers, financiers, and businessmen, in general, together with the gullibility of the public that gave rise to the booms, facilitated by Debt, which gave rise to the later depression. It was the household debt that made the depression of 1930s so much worse than the previous depressions. Whether a “correct” Monetary Policy would have made it less bad is inconsequential.
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