We Should Have Seen It Coming

If you’re one who believes that there is little new under the sun than the following from the WSJ economics blog might well reinforce that view. It’s some thoughts from Irving Fisher, an economist who lost his shirt in the crash and then turned to analyzing the elements of the Depression.

He outlines the problems of over-consumption, over-spending and over-indebtedness, and what their effects can be. He might as well be talking about the recent housing bubble when he writes: “Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100% per annum by borrowing at 6%, he will be tempted to borrow, and to invest or speculate with the borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts… The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realizing a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible”

It seems as if Mr. Fisher pretty much described some seventy years ago what to be wary of during a period of extremely low interest rates. Do you find it as eerie as I do?

We study history in order to have some sense of how to avoid its not infrequent repetitions. Ben Bernanke is reputed to be one of the more eminent economic scholars on the subject of the Great Depression. History may well show that he was, to paraphrase Bill Buckley, standing athwart Alan Greenspan and yelling Stop! On the evidence to date, that would not seem to be accurate. Instead, he seems to have been more an enabler than siren. We can only hope then that his senses serve him better in leading us out of this mess than they have in avoiding it to begin with.

Tom Lindmark

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