Wednesday, March 30, 2011
Zingales vs. DeLong: Eccles wins!
So Luigi Zingales, from the University of Chicago, said that "the current crisis is not a demand crisis, it is a trust crisis," as quoted in Brad DeLong's post. DeLong replies that "bad government policies certainly produced a trust crisis," and "as a consequence, all across the economy agents cut back on their expenditures on currently-produced goods and services." In other words, this is a confidence crisis that led to a demand crisis.
Marriner S. Eccles, the chairman of the Fed during the depression, wrote in his autobiographic book, Beckoning Frontiers, that "confidence itself is not a cause. It is the effect of things already in motion. (...) What passed as a 'lack of confidence' crisis was really nothing more than an investor's recognition of the fact that new plant facilities were not needed at the time." Put clearly, lack of trust is the result of lack of demand. I suppose, in Chicago and Berkeley, Eccles, and common sense, are démodé.