Paper delivered at Annual Meetings, Association for Evolutionary Economics (AFEE), Chicago, January 8, 2012
A. Major Outline
1. The Pecora Hearings, 1933. Another 10 days that shook the world.
2. Hearings sponsored by a dying Republican Congress. Role of Hoover, seeking scapegoat. Role of Senator Norbeck of S.D., an echo of earlier progressive Republicans of the Bull Moose Party.
3. Pecora was a surprise, brilliant, effective, and lethal. He forced leading bankers under oath to admit not just to forecasting errors, but self-dealing and breach of trust. His 10 days set the stage for FDR's 100 days.
4. A major flaw, though, was to narrow his subject to banking and securities -- the paper economy. This has narrowed policy reformers and macro analysts ever since.
5. The academic clerisy has purged much of the real economy from macro studies by compartmentalizing its work. It has sanitized macro from at least the following:
a. Real estate and its endogenous cycle of about 18 years, established and documented by Hoyt and others
b. Austrian analysis of the structure of production
c. Institutional economics
6. Quality of Credit is the obvious link between banking and real estate, and at the core of current banking troubles. Yet the leading Chicago economist Friedman early on ruled out Quality of Credit as a public concern, that would be improper "intervention" in free markets. Only Quantitative controls are permissable.
7. 1945-50 or so, postwar gloom capped land prices. Affordability was high, e.g. in housing and farming. Loans were mostly for production and use: price/earnings ratios were low, payoffs fast. All kinds of taxes remained high, stifling any "Reverberations" Ã¡ la 1920s.
8. What are these "Reverberations"? Effects echoing back and forth between land prices and expansion of bank deposits, forming and exaggerating an up-down cycle.
a. A peace dividend, plus "magnetic" institutions, attract immigration of labor and capital, as in booming California
b. Banks begin shifting from strictly commercial loans to taking real estate as collateral, and lending for longer terms
c. This surge of new demand raises land prices