Experiments in Crash Postponement: 1927/29 Versus 2016/18

Abstract

The onset of a growth cycle slowdown accompanied by some falls in speculative temperatures induced the Yellen Fed in 2016 to turn up monetary stimulus. It was following in the tradition of the Benjamin Strong Fed and the Alan Greenspan Fed which responded similarly in 1927 and 1998, respectively. In these earlier cases, a sharp tightening of monetary policy was only a year or two ahead, and indeed in 1928, the Fed embarked on a deliberate policy of cooling the stock market. Superficially it seems that the Yellen/Powell Fed in rejecting a bold course change even two years on from the “Yellen Put” has endorsed Milton Freidman’s critique of 1928/29—it would have been better if the Fed had continued to focus on preserving the economic upturn and countering price deflation. Pessimists warn that the eventual bubble-bursting could be even more serious. The Friedman counter-factual narrative is extended here to consider whether a delay of the 1929 crash and recession might have saved the Weimar Republic and allowed a new German-US entente to flourish.