Fighting this Depression with the Last Depression’s Tactics is a Recipe for Disaster
By Frank Ryan
July 6, 2012
In Chairman Bernanake’s doctoral thesis, he “focused on the role of monetary policy in affecting economic activity, and on the historical analysis of the causes of the Great Depression.”
His thesis and resulting understanding of the negative impact that uncertainty has on business cycles should provide insight on the actions needed by government to resolve our current economic difficulties. In short, Dr. Bernanake understood that “[i]t is shown that increased uncertainty provides an incentive to defer such investments in order to wait for new information” (page 2 of the dissertation). In the same paper, he wrote, “Uncertainty is seen to retard investment independently of considerations of risk or expected return. Introduction of uncertainty can be associated with slack investment, resolution of uncertainty with an investment boom.”
The causes and nature of the first Depression have been studied extensively. It has become increasingly obvious that there were a series of events that collided to bring forth the “Great Depression.” Be it fragmented fiscal policy, bank failures, collapsing prices on farm goods, the events of the economic malaise caused by the Versailles Treaty in Germany, the collapse of foreign trade, or the stock market collapse of 1929, it would be difficult to deduce that one single event caused the “Great Depression.”
In real terms, deflation had set in, and the “perfect economic storm” came into being. Once the ravages of deflation become clear, the fears of inflation dissipated.