Alexander Field vs. Scott Sumner (and others)

Field writes,

The thesis that massive monetary accommodation in the early 1930s could have almost entirely eliminated the output cost of the Great Depression needs to be reconsidered. Balance sheet considerations were likely implicated in the slow recovery then as well as now, and might have resulted in persistent output losses, even in the presence of different monetary policy.

In fact, the analysis behind this claim is certain not to impress Sumner, because Field views monetary policy in the recent crisis as accommodative and Sumner does not.

Later, Field writes,

whereas the real economy appears to have largely shrugged off the end of the residential real estate bubble in 1926, that does not appear to have been the case with the stock market crash of 1929 and the slow, sickening slide to a trough in 1932, marked as it was by some of the largest one day percentage increases in stock prices. And whereas the real economy appears to have largely shrugged off the collapse of the Tech stock bubble in 2000-2001, that does not appear to have been the case with the real estate collapse that began in early 2006…This asymmetrical real economy response to asset price deflation is associated with almost diametrically opposed opportunities for leveraged asset acquisition in housing and equities during the run ups to the two crises.

In other words, there is a parallel between buying houses with little money down in the recent period and buying stocks on margin in the 1920s.

Some other points.

1. In both circumstances, the leverage created in the financial sector was even greater than that among households. Think of the thin capital margins that banks had for their mortgage security portfolios. Think of the stocks that were issued in the 1920s merely to buy other stocks.

2. Field’s view that the real estate collapse of the 1920s was relatively harmless runs explicitly counter to that of Steven Gjerstad and Vernon Smith.

3. Field notes that in the 1920s the housing collapse was larger in construction volume but much smaller in house prices than the recent collapse. I imagine that one explanation for this is that in the early 19th century there was much less land use regulation, so that the supply elasticity of housing was greater.