A Much-Appreciated Appreciation

The NY Times reports:

China’s currency rose steeply against the dollar this week, feeding speculation that Chinese authorities, yielding to international pressure and economic realities at home, were allowing their currency to appreciate more rapidly.

The currency, known as the yuan or renminbi, rose 0.9 percent this week — faster than over any week since China stopped pegging it to the dollar on July 21, 2005. Thursday, the yuan rose 0.37 percent, the largest one-day increase since the peg ended. On Friday, it rose 0.18 percent, to close at 7.3041 to the dollar in Shanghai trading. That may be a sign that China is moving away from its policy of intervening in foreign exchange markets to keep its currency undervalued.

That would be good news for US exporters - a stronger yuan means that China can buy more US goods. Of course, there are some down-sides for the US: (i) prices of all the goods we import from China will rise - though the process of "exchange rate pass through" tends to be slow - which will hurt consumers, and possibly add a bit to the Fed's inflation concerns and (ii) as the trade gap narrows, China will be purchasing fewer American assets, which will be bad for asset prices - in particular, the price of bonds (i.e. interest rates may rise as the "capital inflow" from China diminishes).

On balance, its a good thing - a situation where a relatively poor country was lending billions to a rich country seemed perverse and precarious (and presumably unsustainable, though there's been some debate about that). Allowing the yuan to appreciate more is a good step towards an unwinding of these imbalances. In the US, increased employment in exporting sectors may help make up for some of the ill-effects associated with the real estate market decline.

This will also help China raise its own living standards and contain inflation. Moreover, other developing countries that compete with China (e.g. Mexico) will also benefit.

Krugman on Trade (!)

Long before he became a pundit, Paul Krugman was one of the world's leading trade economists, so it was nice to see him take a break from picking on Barack Obama to write about trade in his NY Times column today. Interestingly, the argument he makes in the column implies that his own theory is becoming less relevant as a description of US trade patterns.

In standard textbook neoclassical trade theory ("Heckscher-Ohlin"), countries specialize according to their factor (resource) endowments - e.g. a country with a large amount of arable land (relative to other factors) will specialize in food production, while a capital-abundant country will specialize in manufactured goods. The countries will exchange food for manufactured goods. That is, trade occurs because the countries are different, and they specialize in different goods.

One significant weakness of this theory is that much of the trade that actually occurs in the world is between similar countries, trading similar products ("intra-industry" trade) - e.g. Canada exports cars to the US, and the US exports cars to Canada; Italy exports wine to France, and France exports wine to Italy.

In his earth-shattering paper "Increasing Returns, Monopolistic Competition and International Trade" (Journal of International Economics, 1979), Krugman developed a model to explain how two similar countries gain from trading similar products. In Krugman's model, firms in each country produce differentiated varieties of similar goods (e.g. Heineken and Samuel Adams are both varieties of beer). Trade allows the firms to produce on a larger, more efficient scale, because they can sell their product in a larger market, and consumers gain access to more varieties of goods.

This is what he is talking about here:

Trade between high-wage countries tends to be a modest win for all, or almost all, concerned. When a free-trade pact made it possible to integrate the U.S. and Canadian auto industries in the 1960s, each country’s industry concentrated on producing a narrower range of products at larger scale. The result was an all-round, broadly shared rise in productivity and wages.

What is new, according to Krugman, is:

We now import more manufactured goods from the third world than from other advanced economies. That is, a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages.

On his blog, he provides a graph. In terms of trade theory, what is going on is that a larger share of trade is with countries that have different factor endowments - e.g. China is abundant in unskilled labor and the US is abundant in skilled labor (this recent Washington Post story has some good examples of this type of trade). Krugman:

Although the outsourcing of some high-tech jobs to India has made headlines, on balance, highly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade. For example, ThinkPad notebook computers are now made by a Chinese company, Lenovo, but a lot of Lenovo’s research and development is conducted in North Carolina.

But workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices at Wal-Mart aren’t sufficient compensation.

That is, a growing share of our trade is explained by the neoclassical model (and a smaller share by the Krugman model). Neoclassical theory has very clear distributional implications - trade increases the relative returns to the abundant factor. For the US that means skilled workers will see increased wages, and wages for unskilled workers will fall. This leads to the conclusion:

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Greg Mankiw promises we will hear more from Krugman in the Brookings Papers on Economic Activity.

Update (12/29): On his blog, Krugman responds (He says: "Earth-Shattering? I’m proud of my early work on trade, but not this proud still, thanks for the compliment." I could have said "seminal" but I don't think that would have quite done it justice... he, along with a few others, really did change trade theory. Unfortunately trade pedagogy and trade policy discussion haven't really caught up). Krugman also offered some background on the issue of trade and wages. His column prompted thoughts from KNZN on the politics and economics of trade, and Free Exchange weighed in, too.

Ingenious Mendacity

The "subprime fiasco" (and almost every other financial crisis ever) in a nutshell:

The good times too of high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it, there is a happy opportunity for ingenious mendacity. Almost everything will be believed for a little while, and long before discovery the worst and most adroit deceivers are geographically or legally beyond the reach of punishment. But he harm they have done diffuses harm, for it weakens credit still farther.

From Walter Bagehot, Lombard Street: A Description of the Money Market (1873).

I'll Have What He's Having

NY Times columnist Tom Friedman writes:

Today’s global economy has become like a monster truck with the gas pedal stuck, and we’ve lost the key.

Well.... I'm not sure what the appropriate fiscal and monetary policy response is for that, but the place to look for the key is, of course, under the street light.

New Inequality Data

The NY Times reported Friday:

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.

The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.

The data come from the latest update of the CBO's Historical Effective Tax Rates report, which combines the effects of all the federal taxes - income taxes, payroll (social security) taxes, corporate and excise taxes, to show how the tax burden is distributed across households of varying income levels. As part of figuring this, they put together data on income inequality. From the data in the supplemental tables, here is a picture of how the distribution of income has evolved since 1979 (when the data begins), by quintile (i.e. each slice is the share of income going to 20% of the population, with the poorest 20% on the bottom and highest-earning 20% on top):The share going to the top 20% has risen from 42.4% in 1979 to 51.6% in 2005, while all the others have decreased. I've used the after-tax data, so this is income after accounting for whatever redistribution occurs through taxes and transfers (in the pre-tax data, the distribution is even more unequal).

As the lede from the Times story suggests, much of the action is at the very top, as the highest earners are pulling away from what we might call the "upper middle class" (or UMC). In 1979, average income in the top 20% was 5 times that of the middle, and incomes in the top 1% were 10 times those in the middle. By 2005, these multiples increased to 9 and 27, respectively:

Presumably the greater volatility for the top 1% is because they receive a higher share of income from financial assets (the dip in 2001-02 coincides with a bear market; the Times story's focus on 2003-05 makes the change in distribution seem more sudden than it really is).

CBO Director Peter Orzag discussed the report (and methodology behind it) on his new blog. A further breakdown (and more charts) can be found in this brief analysis by the Center on Budget and Policy Priorities.

This issue came up in Greg Mankiw's interesting post on how economists of the "left" and "right" differ - his last point was:

There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it?

Mark Thoma spoke for the "left" (or, probably really the "mainstream" since Democrats outnumber Republicans among economists by 2.9-to-1) in his response:

Fair or unfair depends upon how well markets are functioning. If you do not believe that markets are competitive, or that opportunity is equal, then the intervention and redistribution may be correcting the outcome toward what a perfectly competitive, equal opportunity system would produce rather than away from it. It's not that we don't believe that competitive markets are fair, though I can only speak for myself, it's that we don't believe markets that deviate from perfect competition in important ways, i.e. have important market failures, produce outcomes that have defensible equity properties.

There are good reasons for those on the right, who may have trouble seeing either injustice or market failure, to be concerned as well. This is because of two tensions -

1. The contradiction between Christian gospel teaching and extreme wealth, (see, e.g., Matthew 19:24). Growing inequality may lead the part of the "right" that is "Christian" to reconsider whether their politics is truly consistent with their religious views.
2. The tension between political equality and economic inequality. Extreme inequality could ultimately undermine political support for the "free market" economic system and generate more support for "populist" economic policies.

Throughout most of its history, the US has generally shown an exceptional ability to live with the contradiction between economic inequality and the political and moral equality of our political and (majority) religious creeds. As economic inequality continues to increase, thoughtful people of the right may want to consider whether this ability is limitless.

World-Changing and the PhD

Chris Blattman of Yale offers advice about graduate school for people "are young, idealistic, and want to pursue PhD research that makes life better for those less fortunate." This came to my attention via Dani Rodrik, who says:

In my experience, though, too many students who are interested in making a difference in the real world go on to the Ph.D--and for the wrong reason. As I always tell students asking me for advice on this, the only good reason to want to do a Ph.D. is that you want to be an assistant professor at some academic institution.

I'm inclined to agree with Rodrik - the PhD is a research-oriented degree, and since most jobs for PhDs are in academia and the job market is relatively thin (PhD economists can get good jobs, but usually have limited choices) people who go into PhD programs hoping to do something non-academic may be setting themselves up for disappointment. However, some of the commenters on Rodrik's blog make a case that a PhD is an important credential for working at multilateral institutions like the UN and World Bank.

This made me think of the last of Marx's Theses on Feuerbach (which, like Nigel Tufnel's amplifiers, go to eleven):

The philosophers have only interpreted the world, in various ways; the point, however, is to change it.

If you agree with that, a PhD may not be for you; if you're response is "interpreting the world, in various ways, sounds like a great job," then you should consider applying for graduate school.

To be sure, research and teaching do "make a difference," so an academic job does feel socially useful, but professors generally don't get the gratification of concrete or immediate results from their work.

We're #962,510!

According to Technorati, Twenty-Cent Paradigms has cracked the known universe's top million blogs. Some credit, and thanks, goes to Mark Thoma of the indispensible Economist's View who has linked to several posts here, thereby increasing the "authority" of this blog.

Exchange Rates, Intersectoral Reallocation and Highway Beautification

The NY Times reports that several European automakers are considering opening more US factories:

The dollar’s falling value is making European automakers eager to build more vehicles in the United States, even as American car companies continue to shift production to other, lower-cost countries.

Fiat, the Italian carmaker, is the latest company to suggest that it may build a plant in the United States. Its chief executive, Sergio Marchionne, told Automotive News Europe for an article published Monday that its sports car brand, Alfa Romeo, needs a North American plant to be profitable. Alfa Romeo is returning to the United States next year after a 13-year absence.

This is a good example of how exchange rate movements can induce a reallocation of resources (and the presence of adjustment costs means that the exchange rate movements are larger, as I demonstrated here). If someone leaves a retail job to work at the Fiat factory, that's a shift of labor from nontradable to tradable production, induced by the dollar's weakness (a US dollar currently sells for 0.68 Euros).

The investment by Fiat would be another manifestation of the financial inflow that is the flip side of the trade deficit - the countries that we have trade deficits with are mostly getting financial assets (stocks and bonds) in return for the goods they're sending us, but in this case the inflow would take the form of foreign direct investment. The accumulation of US assets by foreigners means that our "net income from the rest of the world" is likely to become increasingly negative over time, opening up a gap between GNP and GDP. In this case, the output of the Fiat factory would add to US GDP, but some of the profits (the capital income) would go back to Italy, contributing to Italian GNP.

That is, if the factory gets built - and I hope it does; that Alfa-Romeo looks like a seriously sweet car.

Remebering the 1980s

On its 20th anniversary, the Times revisited The Bonfire of the Vanities, Tom Wolfe's novel capturing the zeitgeist of the 1980's. I particularly liked this comment:

“Twenty years later, the cynicism of ‘The Bonfire of the Vanities’ is as out of style as Tom Wolfe’s wardrobe,” proclaimed the Rev. Al Sharpton.

The book, which featured a bond trader as main character, came out about a month after the 1987 stock market crash (see this previous post).

Do We Need a Recession?

At Vox EU, Gilles Saint-Paul offers another argument why the US needs a recession (a different one from those discussed in this previous post):

There is agreement among many analysts that the Fed should pursue a low interest rates policy in order to prevent the US credit crisis from degenerating into a recession. On what grounds are we told that? The bottom line is that monetary policy is supposed to fine-tune the economy by targeting inflation and the output gap. Thus, monetary policy is supposed to become tighter when there are fears of inflation, and looser when there are fears of a recession and no sign of inflation. Consequently, the fed’s recent moves to lower interest rates seem perfectly orthodox.

This focus on macroeconomic aggregates ignores any other effect that interest rates can have on the economy. It totally ignores that interest rates are a price which affects many allocative decisions and has important distributive consequences...

The problem is that low interest rates not only stimulate the economy, they do plenty of other things. In other words, focusing only on GDP has costs and may generate mounting problems—the low rates policy makes a current recession better, but the next one may be worse.

One reason why the US economy is less inflation-prone than in the past is that a bigger share of any increase in domestic demand is absorbed by imports: the economy is more open than it used to be. Thus, instead of having “overheating” because demand is greater than supply, the gap between the two is filled by trade deficits. Hence, low rates stimulated consumer spending and the trade balance deteriorated by two percentage points of GDP. The US is rapidly accumulating foreign debt and that may lead to a brutal correction with a sharp drop in consumer spending and a large depreciation of the real exchange rate. In fact, that correction may have already begun. Yet the Fed is not supposed to look at the net foreign asset position of the US economy, even though both its deterioration and rising inflation are the symptom of the same problem – excess domestic demand.

The other issue is asset prices. When interest rates are very low, and expected to remain so, asset prices can be very high.... In particular, low interest rates may start asset bubbles...

The resulting policy prescription is to let the illness take its course:

All this suggests that the US has to go through a recession in order to get the required correction in house prices and consumer spending. Instead of pre-emptively cutting rates, the Fed should signal that it will not do so unless there are signs of severe trouble (and there are no such signs yet since the latest news on the unemployment front are good) and decide how much of a fall in GDP growth it is willing to go through before intervening. As an analogy, one may remember the Volcker deflation. It triggered a sharp recession which was after all short-lived and bought the US the end of high inflation.

If one views the current economic situation as "unsustainable" - i.e., that the low saving rates and large current account deficit cannot go on forever, some significant reallocation of productive resources is necessary. In particular, to get to a more "balanced" state the US needs to consume less, particularly fewer imports, and export considerably more, so we need fewer people working in consumption goods industries and more people in exporting industries. The question is whether this reallocation could be achieved without a recession - if workers could shift sectors instantly, no loss of output is necessary. However, in practice, reallocation entails "adjustment costs" - jobs in one sector need to be destroyed and people need to go through a search (and possibly retraining) process to find a jobs in another sector. In the US, there is a constant "churn" in the labor market as millions of jobs are continuously being destroyed and created, but a major reallocation would entail even more turnover than usual.

Saint-Paul is essentially saying that a low interest rate policy by the Fed is delaying this needed adjustment. It seems clear that monetary policy contributed to increases in asset prices (stocks in the late 1990's, houses more recently), and when asset prices increase, households do not feel the need to save as much - i.e. the consumption function shifts up. This is the "serial bubble blower" critique of the Greenspan Fed. There's some truth in it, but this argument may overstate the power of monetary policy - the Fed is targeting a short-term nominal interest rate. The long-term real interest rates that affect saving and investment decisions are influenced by the Fed's actions, but other factors come in to play. In particular, inflows of foreign saving have played a major role in keeping long term rates low, regardless of the Fed's actions. If our foreign creditors decided to cut back on their purchases of US assets, long term rates could rise, even if the Fed was keeping the fed funds target low - i.e., the yield curve would become much steeper.

One thing that is helping is the decline of the dollar - US exports are becoming cheaper and imports more expensive. This is starting to show up in a decreasing trade deficit. Low interest rates contribute to the dollar's weakness, so in this regard Saint-Paul's prescription would be counterproductive.

The Volcker analogy is not necessarily an encouraging one: although maybe there was no painless way to end the inflation of the 1970's (it was a "disinflation," not a "deflation"), the "double dip" recession in the early 1980's saw the highest unemployment rates since the depression. The high interest rates - partly due to the Reagan-era deficits, as well as tight monetary policy - led to an appreciation of the dollar and a large current account deficit.

Hillary Pilloried on Trade

The editorial pages of both the Financial Times and the Washington Post went after Hillary Clinton for her views on trade yesterday, but several economists have made counter-arguments.

In an interview with the FT, she said:

Well what I have called for is a time-out which is really a review of existing trade agreements and where they are benefiting our workers and our economy and where the provision should be strengthened to benefit the rising standards of living across the world and I also want to have a more comprehensive and thoughtful trade policy for the 21st century. There is nothing protectionist about this. It is a responsible course. The alternative is simply to pick up where President Bush left off and that’s not an option...

...So it’s not that we’re starting on some totally different approach to trade it’s that we have to take stock of where we are today. And specifically with Doha and with these large global agreements, again we have to see what works and what doesn’t work. We have benefited through most of the 20th century from trade. It has helped to raise American standards of living, it has helped to create jobs. And I agree with Paul Samuelson, the very famous economist, who has recently spoken and written about how comparative advantage as it is classically understood may not be descriptive of the 21st century economy in which we find ourselves.

We know for sure that every other country wants access to our markets, because we have high levels of consumer spending since we don’t save anything in America and we have a very vigorous competitive market that is a real prize. On the other hand I want to see living standards improve around the world. I want to see environmental standards improve. And I am concerned by some of the provisions that would prevent countries from for example enforcing stronger environmental and worker safety rules under the WTO. I think we have to take a hard look at this and do it in the right way and that is what I am proposing to do.

On its editorial page, the FT says "Hillary Clinton is Wrong on Trade," FT columnist Clive Crook is critical, and FT blogger Willem Buiter says her invocation of Paul Samuelson* is "complete codswollop." I'm not fluent in British, but I think that's pretty bad. Perhaps she'll think twice next time the FT calls asking for an interview... However, Dani Rodrik finds her views "generally sensible."

Meanwhile, in Washington... a Post editorial slams Clinton (and Edwards and Obama) for criticizing NAFTA on the stump:

Polls show that many Democratic voters are nervous about the potential impact of globalization on their job security. So some Democratic candidates are competing to validate every trade-related anxiety and grievance, no matter how far-fetched. The campaign is turning into a contest to see who can make the most extreme denunciation of the nearly 14-year-old North American Free Trade Agreement.

The editorial is headlined "Trade Distortions," but Dean Baker points out (and Krugman agrees) the biggest distortion may be the Post's use of nominal, rather than real, GDP figures to give readers an inflated picture of Mexico's GDP growth since NAFTA went into effect. That's either intellectually dishonest or economically illiterate.

*Samuelson is one of the founding fathers of neoclassical trade theory. He published a controversial paper in the Journal of Economic Perspectives in 2004 which raised questions about free trade dogma, though not quite in the way Clinton suggests (probably she's too busy campaigning to study for the Econ 441 exam).

Update (12/4): Mankiw on Samuelson's paper.

Update 2 (12/6): Dani Rodrik is critical of Clinton's critics:

Here is what I do not understand. Why is it that anyone who says that the gains from the next trade agreement are not huge, that there are real social and distributional issues we need to confront before we strike the next trade deal, and that perhaps we need to rethink the basis of the multilateral trade regime in light of the severe legitimacy problems which it has run into--all true propositions--is immediately branded as a protectionist who wants to set the clock back?

Update 3 (12/7): Clive Crook replies to Rodrik's response:

Acknowledge and respond to legitimate doubts about the virtues of liberal trade. But where the fears are exaggerated or wrong, our political leaders should say so. Unlike Dani, I think it is very dangerous to concede this intellectual ground. Once the US decides that liberal trade does not serve its collective interest--and Hillary, in effect, is proposing a time-out to think about this--the openness we have is indeed at risk.

Recession Watch: Buiter vs. Summers

Lawrence Summers is worried - like totally having a cow, as we used to say - about the subprime mortgage crisis and attendant credit crunch. In the a column for the Financial Times, he wrote:

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

Summers calls for monetary and fiscal policy need to stimulate aggregate demand:

Maintaining demand must be the over-arching macro-economic priority. That means the Fed has to get ahead of the curve and recognise – as the market already has – that levels of the Fed Funds rate that were neutral when the financial system was working normally are quite contractionary today. As important as long-run deficit reduction is, fiscal policy needs to be on stand-by to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families if the situation worsens.

The Fed may be seeing things the same way - markets responded positively to a hint that the fed may lower the federal funds rate at its Dec. 11 meeting. The Times reported:

Speaking one day after another top Fed official signaled that policy makers might have to reduce interest rates to head off trouble, Mr. Bernanke pledged that the Fed would remain “exceptionally alert and flexible” in setting policy.

Maybe they're just stretching, and drinking more coffee? Amidst all this freaking out, the BEA reports that the US economy grew at an annual rate of 4.9% in the third quarter (revised upward from the preliminary estimate of 3.9%, Ecconbrowser breaks down the numbers). A growth rate like that is normally cause for concern that the economy is "overheating," to which the Fed would respond by raising rates. Willem Buiter offers an incisive, contrarian assessment of the US economic situation under the headline "Should the Fed raise interest rates?":

Judging from the noise, moans and calls for policy relief coming from the financial sector, one could be forgiven for believing that the end of the world is neigh. It's not...

The good news in all this is that much of the financial sector has become quite detached from the real economy. The implosion of much of this formerly privately profitable but never socially productive financial intermediation will have little if any adverse macroeconomic effect. Many, perhaps most, financial institutions today are engaged in a gigantic, worldwide game of musical chairs in which vast fortunes are won and lost every day, but nothing of macroeconomic significance happens...

All the Sturm und Drang in the financial sector today only matters from a macroeconomic perspective, if it has a material effect on household consumption and on household and corporate investment. In my view, rather little of it does.

He goes on to argue directly against Summers, making a case that fiscal and monetary policy should not be used stimulate consumption now because a shift away from consumption into saving is exactly what's needed to correct the current account deficit:

There can be no doubt that private consumption expenditure (about 70% of US GDP and also by far the most stable component of GDP) is going to weaken significantly. And so it should. The long-overdue and necessary increase in the US private saving rate is a necessary domestic counterpart to the long-overdue and necessary reduction in the US external trade deficit, which is the contribution of the US (necessary and long overdue) to global rebalancing....

Surely the time for a consumption slump in the US is now, when the weakness of the US dollar and the strength of global demand will mitigate the impact on aggregate demand and employment? If not now, then when or under what circumstances?

And he also has harsh words for the Fed:

Throughout the crisis, the Fed's communication policy with the markets has been atrocious. My fear is that this communication policy mess reflects a deeper confusion/disagreement in the Fed about how to respond to the crisis, and about both the ultimate and the proximate objectives of monetary policy.

In addition to communicating poorly, Buiter believes the Fed is too responsive to financial markets:

They fear a large fall in the stock market; they fear financial market turmoil; and they can be moved to cut rates if there is a sufficient crescendo of anguished voices from the financial markets and money centre banks. We all know that the Great Depression of the 1930s started with a stock market collapse and was aggravated by bank runs and a misguided monetary policy. The collapse of the multilateral trading system was the final nail in the coffin. Perhaps our central bankers have studied the 1930s too much.

Ouch. That's a swipe at Bernanke, who was a noted academic expert on the depression before becoming Fed chair.

On a related note, Economists' View has a useful summary of a recent speech by St. Louis Fed President William Poole, defending the Fed against the accusation that it is too concerned with bailing out financial markets.