The Puzzle of the Dynamic of a Crash:
Yield Curve.
Irrational Exuberance.
Greenspan Conundrum.
Discontinuity.
Low Risk Premia.
Get Up and Dance, Twist... and Shout.
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Preface:
The writer of a article such as this, treading along unfamiliar paths, is extremely dependent on criticism and conversation if he is to avoid an undue proportion of mistakes. It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental. In this article, even more perhaps than in writing my Tract Pro Bono, I have depended on the constant advice and constructive criticism and the leads of, among others, Adam Smith and John Maynard Keynes. The index has been compiled by Sir Alan Greenspan.
The composition of this article has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author's assault upon them is to be successful,--a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
Introduction:
In The Tract Pro Bono I prove that, because of of the previous Quantitative Easing, after a short period of exceptionally good economic conditions and Irrational Exuberance, which will inflate the Mother of All Asset Price Bubbles, we will have a Keynes' Liquidity Trap, The Crash and The Deep Depression.
"The slowdown in economic activity, together with high interest rates, was in all likelihood
the most important source of the stock market crash that followed in October.
In other words, the market crash, rather than being the cause of the Depression,
as popular legend has it, was in fact largely the result of an economic slowdown and
the inappropriate monetary policies that preceded it.
Of course, the stock market crash only worsened the economic situation,
hurting consumer and business confidence and contributing to a still deeper downturn in 1930."
Governor Ben Shalom Bernanke
Money, Gold, and the Great Depression.
At the H. Parker Willis Lecture in Economic Policy,
Washington and Lee University, Lexington, Virginia.
March 2nd, 2004
