Comments on Bordo and Landon-Lane Stephen Broadberry (University of Warwick)

Policy lessons from 1930s applied during current crisis BLL compare the 1930s and 2007/08 crises through the prism of bank failures End on pessimistic note, but perhaps too pessimistic? Nearly 80 years elapsed between the two crises Policy response surely much more successful in current crisis (at least so far) than in 1930s Policy makers do seem to have learned the important lessons of the 1930s, even if scholars continue to debate the precise details 2

Policy lessons from 1930s applied during current crisis 1.Fed prevented monetary contraction (Friedman/Schwartz analysis) 2.Fed prevented credit markets seizing up (Bernanke) 3.Fed bailed out insolvent banks (Calomiris/Mason). 4.Expansionary fiscal policy adopted to prevent collapse of real demand (Temin, Romer) 5.International co-operation perhaps imperfect, but surely better than in 1930s (Eichengreen) 3

Links between variables in VAR analysis and policy lessons Bank failures/suspensions due to illiquidity: Friedman/Schwartz see bank failures as “contagion of fear” Bank failures due to insolvency: White, Calomiris & Mason emphasise insolvency e.g. bank failures in agricultural regions in response to declining agricultural prices 4

Variables and links to policy Money stock: Friedman & Schwartz criticise Fed for allowing contraction of money stock Quality spread: Bernanke emphasises importance of contraction of credit Change in unemployment (real aggregate shocks): Temin, Romer emphasise collapse in private consumption, which could have been offset by expansionary fiscal policy 5

Explaining bank failures BLL focus on the issue of whether bank failures were caused by illiquidity or insolvency shocks Impulse response functions suggest illiquidity shocks more important than insolvency shocks in explaining bank failures/suspensions 6

BLL on bank failures Historical decompositions indicate that illiquidity shocks more important in 1930 and 1931 crises, but insolvency shocks more important in 1933 This is exactly OPPOSITE conclusion to Calomiris and Mason, who stress role of insolvency in 1930 and 1931 but suggest a role for illiquidity in

BLL on bank failures BLL critical of micro studies on grounds that cannot see common factors driving local and regional bank failures, that may have been national in scope But results of VAR analysis depend on identifying assumptions. Most importantly, illiquidity failure series is ordered before insolvency failure series 8

BLL on bank failures Justification for this is that illiquidity shock can cause contemporaneous failure of otherwise solvent banks, but insolvency shock can cause bank run only with a lag. But is this true with asymmetric information and monthly data? Sensitivity analysis conducted for some orderings, but not this one 9

Other results for total bank failures Money shocks mattered, as suggested by Friedman & Schwartz, but not as much as illiquidity or insolvency shocks Real aggregate shocks relatively unimportant Quality spread more important than real aggregate shocks, but less important than money shocks 10

Interpretation These interpretations are based on forecast error decompositions for total bank failures. How about forecast error decomposition for change in unemployment? Impulse response functions for change in unemployment shown in appendix Seem to get bigger effect from insolvency shocks than from illiquidity shocks 11