Thursday, 27 September 2012

BBC Masters of Money: F. A. Hayek

(HT: Coordination Problem)


philip meguire said...

This is an exercise in the history of ideas, and in macroeconomic history. It is flawed on both counts. Hayek had little influence on macro reasoning or economic policy, until the 1970s.

In the 2-3 years before the Wall Street crash, nominal interest rates were rather high and inflation was low. About 1 year before the Crash, the Fed really put the squeeze on bank credit. The whole thrust of this documentary is on the evils of lax monetary policy. But the tragedy of the Great Depression was that American monetary policy was too tight during 1930-31. There was massive deflation, yields on risky debt hit all time highs, and property prices hugely declined. When Lord Norman wisely took the UK off gold in September 1931 (did Hayek approve??), the Fed raised the discount rate by 150 basis points, an action which nearly ended the American economy.

We will never know what would have happened if the US had abandoned the gold exchange standard and the Fed had bought $10-20 billion of Treasury obligations and possibly some AAA corporates. That has essentially been the USA response to the GFC: no gold standard, a tripling of the monetary base so that M0 now exceeds M1, and holding $1 trillion of mortgage backed securities "insured" by Fannie and Freddie.

philip meguire said...

UI am quite confident that there would never have been a property market bubble and meltdown, and never been a GFC, had the the loan to value ratio for property market purchases not been allowed to exceed, say, 70%. Having to pay 30% of the asking price in cold cash would have taken most of the wind out of property speculation. A consequence of such a policy is that when there is upper pressure on house prices, the rate of owner-occupancy would decline, as houses would end up in the hands of cash-rich individuals who would buy them as rental properties. This decline in home ownership would violate a host of stupid taboos, grounded in the widespread belief that owning one's residence is a fundamental right. There is no such right, of course.