Monday, April 6, 2009

Stick to the Facts

Steven Gjerstad and Vernon Smith have added to the confusion surrounding the causes of the current financial crisis. In an interesting op-ed today in the Wall Street Journal, Gjerstad and Smith argue that the great crash of 1929-33 could not have been caused by monetary contraction because otherwise, as they put it in their article, "the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis."

Sounds convincing doesn't it? Unfortunately, there were no "massive injections of liquidity" until fairly recently. The Fed finally injected significant liquidity into the economy starting in September of 2008, fairly late in the game and, by my arithmetic, roughly six months ago, not 18 months ago. Had there been "massive injections of liquidity" eighteen months ago, which would have been in the Fall of 2007, then Gjerstad and Smith could have a case. But, the facts are otherwise. Once again, the facts of this crisis fall victim to ideology.

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