1. EH447, 08/09, Week 3-1 Great Depressions in Economic History Fisher v Keynes: A Housing Bubble?

2. fisher v Keynes: A Housing Bubble? 2 of 49 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

3. fisher v Keynes: A Housing Bubble? 3 of 49 Housing Market in U.S.  Residential construction up in the 1920s  Serious housing slump after 1929  Keynesian interpretation focused on this

4. fisher v Keynes: A Housing Bubble? 4 of 49 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

5. fisher v Keynes: A Housing Bubble? 5 of 49 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

6. fisher v Keynes: A Housing Bubble? 6 of 49 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

7. fisher v Keynes: A Housing Bubble? 7 of 49 Evidence: value of residential building permits

8. fisher v Keynes: A Housing Bubble? 8 of 49 Evidence: forecasting the G-D from leading indicators on investment Forecasts mostly in line with realized output data, already before NYSE crash

9. fisher v Keynes: A Housing Bubble? 9 of 49 Conclusion  Keynesian interpretation originally a long-term (“secular”) approach  Centers around expected end of growth on extensive margin  Consistent with evidence on investment