EH 447 08 09 Week 3 -1 Great Depressions

EH 447, 08/09, Week 3 -1 Great Depressions in Economic History Fisher v Keynes: A Housing Bubble?

fisher v Keynes: A Housing Bubble? Irving Fisher on Housing § 1929: “high level of stock market justified” (see next lecture) § Got into negative equity on his house in New Haven/CT (Yale Univ. ) § Developed debt-deflation doctrine as a result 2

fisher v Keynes: A Housing Bubble? Housing Market in U. S. § Residential construction up in the 1920 s § Serious housing slump after 1929 § Keynesian interpretation focused on this 3

fisher v Keynes: A Housing Bubble? Keynes (1937) on G-D § World caught between two Malthusian Devils – Overpopulation – Underemployment § Population slowdown in U. S. , Europe – Necessitates investment slowdown – and decline in savings rates 4

fisher v Keynes: A Housing Bubble? Secular Stagnation Hypothesis Keynes (1937), Hansen (1938, 1941): § Investment rates should go down § Consumption / income ratios should go up BUT § Consumption decision behavioral Interest rate mechanism ineffective necessary downward adjustment of saving is delayed Long term unemployment 5

fisher v Keynes: A Housing Bubble? Residential investment Temin (1971): § Investment slump causal for G-D § Much of this led by housing slump § Moderate version of Keynes/Hansen view Received scathing criticism 6

fisher v Keynes: A Housing Bubble? Evidence: value of residential building permits 7

fisher v Keynes: A Housing Bubble? Forecasts mostly in line with realized output data, already before NYSE crash Evidence: forecasting the G-D from leading indicators on investment 8

fisher v Keynes: A Housing Bubble? Conclusion § Keynesian interpretation originally a long-term (“secular”) approach § Centers around expected end of growth on extensive margin § Consistent with evidence on investment 9