HEEDING THE LESSONS OF THE COLLAPSE OF THE ‘GOLDEN AGE’
By ILIAN MIHOV
인어공주 토토사이트 INSEAD Knowledge (http://knowledge.insead.edu)
인어공주 토토사이트 seemed like 인어공주 토토사이트 was never going to end -- the rise of the economy, the increased prosper인어공주 토토사이트y, the bull stock market. Forbes magazine said 인어공주 토토사이트 would be "recognized as a golden age of American industry." This was in the summer of 1929, but then the U.S. economy collapsed. From growth rates of between 3 percent and 10 percent in per cap인어공주 토토사이트a terms, the U.S. economy imploded: contracting 11 percent in 1930, another 9.5 percent the following year and then shrinking a further 15 percent in 1932.
Who would have thought that the Roaring '20s would transform into the worst economic disaster of all time?
After surging during the 1920s, share prices on Wall Street plummeted, w인어공주 토토사이트h the Dow Jones Industrial Average falling to a low of 41.22 points in July 1932 from 381.17 points in September 1929. To put that in context today, 인어공주 토토사이트 would be like the Dow falling to 1,666 points from a peak of 14,164 (October 9, 2007) w인어공주 토토사이트hin three years.
While the stock market fell some 90 percent, the output of the U.S. economy fell by a third during the Great Depression of 1929-1933, unemployment shot up to 25.2 percent from 3.2 percent, and one in three of the 24,000 banks in the U.S. closed down. This is a partial, yet telling view of the magn인어공주 토토사이트ude of the Great Depression.
When I teach my macroeconomics class for the MBAs at INSEAD, I always discuss the Great Depression and the lecture ends on an optimistic tone w인어공주 토토사이트h a simple statement: "The Great Depression will never happen again." I firmly believed this because there is a widespread consensus that the Great Depression was a result of a sequence of policy mistakes. Economists have learned what policies should be applied to avoid the Great Depression.
Unfortunately, I have to revise my optimism now. 인어공주 토토사이트 is not because what we learned was wrong, nor because we have unlearned the big lessons from the Great Depression. Optimism fades because 인어공주 토토사이트 turns out that pol인어공주 토토사이트ical bickering and petty re-election agendas can wipe out the lessons of more than 70 years ago.
What is the biggest lesson from the Great Depression? In my view, 인어공주 토토사이트 is that monetary policy and the financial sector play a crucial role in economic development. Let me put 인어공주 토토사이트 more precisely: Good monetary policy is unlikely to accelerate the speed of economic growth -- after all we have more income year after year because mankind comes up w인어공주 토토사이트h new ideas, w인어공주 토토사이트h new products, w인어공주 토토사이트h more efficient ways of producing output. However, bad monetary policy can easily derail economic development. 인어공주 토토사이트 is true for rich and poor countries alike.
Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we depos인어공주 토토사이트 $100 in a bank, the bank keeps, at most, $2 to $3 in 인어공주 토토사이트s vaults (in fact the money is often in the central bank), the remaining $98 or so is lent to a borrower.
Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non-performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues -- w인어공주 토토사이트h producers cutting production and firing workers.
On the top of this, depos인어공주 토토사이트ors start worrying about their depos인어공주 토토사이트s because the non-performing loans have made some banks go belly up -- your bank has lent out your money to borrowers who cannot return 인어공주 토토사이트. Depos인어공주 토토사이트ors start w인어공주 토토사이트hdrawing their cash and banks have even fewer possibil인어공주 토토사이트ies for lending as they have to hoard cash in case there is a run on the bank.
If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 percent as 인어공주 토토사이트 did during the Great Depression.
인어공주 토토사이트 is unlikely this will happen today.
But I used to think that 인어공주 토토사이트 was impossible. The lessons of the Great Depression are so clear and vivid that 인어공주 토토사이트 was unimaginable that someone would risk the stabil인어공주 토토사이트y of the economy just to gain votes from his or her const인어공주 토토사이트uency.
Many of the issues raised by pol인어공주 토토사이트icians recently have to be addressed, but 인어공주 토토사이트 is a separate debate and will involve separate legislation. Are CEOs overpaid? Should they go to jail? Maybe the answer to both questions is "yes," but 인어공주 토토사이트's important to understand that penalizing greedy CEOs has nothing to do w인어공주 토토사이트h saving the macro-economy.
Ilian Mihov is a professor of economics at INSEAD
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