Comments on Olney

Martha L. Olney (1999), “Avoiding Default: The Role of Credit in the Consumption Collapse of 1930.” Quarterly Journal of Economics CXIV (February 1999): 319-335 http://links.jstor.org/sici?sici=0033-5533%28199902%29114%3A1%3C319%3AADTROC%3E2.0.CO%3B2-R.

Comments

[Chris Schoeneborn]

Olney's article seems to touch on a very similar problem the U.S. economy is facing today in 2007. In our curret "credit crunch," many families have faced serious consequences following their inability to pay off sub-prime loans on mortgages. Olney cited the large decrease in consumption following the October, 1929 stock market crash due to the expensiveness or burdens of default loans. Families had most of their credited goods repossessed after late installment payments, leaving them unable to liquidate these assets. It wasn't until 1938 that the federal government took measures to protect the consumer and required Ford and Chrysler (cars were the majority of items bought on credit) to give the purchasers the surplus on the repossessed item. If the Great Depression is a good indication of what our economy wants to avoid, the government must take steps to deter fraudulent loans and lending.

[Lara Palanjian]

Martha Olney seems to present a Keynesian account or explanation for the Great Depression, for she argues that a major collapse in consumer spending caused by large debts is what exacerbated the depression. Her argument is similar to that which Christina Romer makes, which is also centered around how aggregate demand shocks negatively affected the 1930s economy. When the stock market crashed, there was widespread income uncertainty, falling wages, and increased layoffs. Olney does not place emphasis on these factors, but discusses how the credit-financed boom of the 1920s led to the big drop in consumption in the 1930s specifically because consumers had high debts and wished to avoid default at all costs. Consumers needed to reduce consumption in order to retain money for installments plans. Yet Olney’s article brings up an interesting implication: if consumer demand was the issue at stake in relieving the depression, why didn’t the federal reserve move to reduce interest rates and encourage spending and investment?

[Tiffany Tam]

Martha Olney's article was a very easy read, not only is she a great professor but she is a great writer as well. In one of her economics classes she taught about subprime mortgage loans thus it does not surprise me that she mentions it in this article. She argues that the cause for the Great Depression is the decrease in spending, which leads to decreased income for companies, overproduction, lower wages which then leads to even lower spending and a rise in prices ultimately creating a long cycle of depressing events. AFter the stock market crash there was a rise in price of loans which is understandable, but these effects are all a series of chain of events. Consumers need to save money in order to pay for goods in the future, but if all families are saving then there is no money cycling through the economic system so the logical idea would be to lower interest rates so more people will borrow and spend money, but that is the crises of subprime mortgage loans where individuals are unable to pay back the debt. This is a very difficult cycle to solve...

[Patrick Humphreys]

On the whole, I enjoyed the article and found it quite interesting. However, I think the overall analysis could have been strengthened if the decrease in consumption was put into better perspective. Initially the autonomous decline in aggregate consumption is referenced and default costs are proposed as its cause, but we do not know how large the overall decline is until the article is nearly over. I also thought the Chrysler-Ford consent decree needed to be put into perspective. What was the market share of both of these companies at the time? Did other sales finance companies follow their lead? It would have been helpful to quantify the influence of these companies in the installment debt market. The last issue I had with the article centers on the costs of default. These costs are mentioned briefly in terms of losses to finance companies, but what would have been the overall costs to consumers if default rates became excessive and lenders reduced credit. I would have liked to have seen these potential costs quantified in some manner. These issues aside, I still think the article is well written, persuasive, and particularly relevant given current events.

[Tiffany G T Tam]

Martha Olney’s article, “Avoiding Default: The Role of Credit in the Consumption Collapse of 1930”, does a good job of analyzing the reasons behind the stock market crash of 1929. To explain the drop of consumption in 1930, she presents Mishkin’s and Romer’s ideas that change in household balance sheets caused a sharp decline in purchases of durable goods and that the 1929 stock market crash increased uncertainty and caused decreased purchases of irreversible durable and semi durable goods. However, Olney argues that there are many other reasons that contribute to the drop in consumption. She explains that the combination of high consumer indebtedness and default consequences are reasons that consumption dropped in 1930. Today, debts are about 18% of personal income in the United States. Some of the factors that account for this debt are the amount of personal things that people need to put on credit such as furniture and automobiles. It is astonishing to discover that the consumption of goods can do so much damage to an economy.

[Jessica Li]

In her analysis, Olney argues that the decline in consumer spending, as a result of uncertainty from the stock market crash, had caused the Great Depression. She points to the increasing indebtedness from installment buying and the severe consequences of default suffered by the consumers in durable goods as the cause of the dramatic decrease.
The severe economic effects and consequences of the depression should serve as a valuable lesson for modern government agencies to learn from the mistakes of their predecessors. It will be an instrumental tool in assessing current economic conditions, and then applying sound monetary and fiscal policies accordingly.
The article was also very interesting, for some of the issues raised continues to have application in modern American economy. Consumers, typically lower to middle class, still purchase many durable goods on installment credit. Additionally, the credit card has further revolutionized buying on credit. However, the continuing trend of credit buying is the accumulation of excess debt for many individuals.

[Yufei Li]

A decrease in consumption is the culprit. It transformed what was initially perceived as a small recession into the Great Depression.
Olney explores this focal economic event in our recent history. The credit revolution that commenced during the 1920s established a growing consumer lifestyle: installment credit was used to sustain the consumer demand of furniture, cars, and electric appliances of American’s commercial boom. It is interesting to note that the 1929 stock market crash itself affected few families through the direct loss of wealth since few households were directly involved in the market. But the crash did increase household income uncertainty - consumer expectation plummeted. Instead - it was the fear of default due to an uncertain future from installment buyers that accounts for this drop in consumption.

[Aneesh Kadakia]

I found this article to be insightful because my previous impression of the Great Depression was that, yes much of the 20s boom was built around the credit revolution and high-spending on luxury items, but I also though that the reason for the crash and long recession was a high rate of defaulting that credit a big credit mess and destroyed the financial service industry. But as Olney mentions, it was in fact that opposite, credit providers can out the least scathed. Someone above mentioned that the drop in consumption is a very Keynesian explanation, I think this is a valid point. Apparently the consequences for defaulting were so bad that people actually decided to keep making payments and reduced income instead, which really made the depression bad. I agree with Olney that policy makers need to keep this in consideration when dealing with the next recession, to make defaulting slightly more favorable then to drive down consumption.

[Matthew Cohen]

I find it somewhat amusing that Olney essentially begins her article by comparing the indebtedness of the 1930s to today’s credit-driven economy. It really exemplifies the cliché of history repeating itself, except that there will probably be a different ending this time around. I think (as do most of the commenters above me) it is interesting that the worst part of the depression was a result of a severe decline in demand, rather than the all-too-present credit problems. Additionally, I think that it is interesting that, in nearly 90 years, Americans as a population have still not learned to control their debt. Aside from being embarrassing, it points to a significant flaw in the way that we are taught to handle money.

[Wei Li]

Olney writes on a very similar issue to the subprime mortgage crisis that we are facing today. The defaulting on loans which caused much of the economic turmoil in the 20's and 30's is a very similar case to the defaulting of home loans today. As housing prices decreased, many find it very hard to find refinancing for their mortgages. Thus they end up defaulting on their loans creating problems in the US credit market. Similar to the 1930's if consumption spending take a hit because of the credit situations, a severe recession could take place. If the consumption of durable goods and long term items, there will be severe implications on the overall economy like there was in the 30's. It is up to the US government to take action now, and the half point cut in interest rates might not cut it.

[Sean Tennerson]

I personally have a lot of respect for the opinions of Martha Olney; I believe that her economic ideas are, for the most part, well informed and logical. I was slightly surprised when I realized that, in the article, she is explaining that it is dangerous for implementations to attempt to limit the number of defaults on credit, by making huge losses for the debtors. On further reading of her work, I can understand her argument. If a borrower will face huge losses in the event of a foreclosure, but is in a position where spending must be cut, consumption expenditures will be cut, because, economically individuals are profit/benefit maximizers and loss minimizers. When that view point is considered it is easy to visualize the Keynesian Cross in which aggregate demand, or consumption, is lowered, which results in a lower level of output at market equilibrium. Also, Olney's idea of people bringing about their market fears plays into this event. For example when consumers expect markets to do badly their actions will bring about greater recession, because they limit their consumption which in the end lowers output and GDP in general for that nation. These occurrences being evident in the time of the Great Depression, should, as Olney points out, be a very bold warning to the people of the current US, because of the parallels to the depression era in credit usage, uncertainty about the future, etc. which she points out. I think that she gives good guidance for the present that default should not be completely avoided, and should be taken as an unavoidable aspect of the economy, so as to maintain consumption spending in times of recession, which by the Keynesian Cross should cause a slow down in the recession.

[Alexis Geno]

Like most people who commented on this article, I find Olney’s article to have a very interesting view. Americans have for years and years lived on credit and in some way, I feel that this is part of the American dream. Anyone is able to come here in the US and just by working could own a car, a house, and most necessities one cannot have from where they are from. On personal experience, my mom’s good friend always tells me that this is one of the best things about coming to America. Like Aneesh, I do agree that this is a flaw in the way we are taught to handle our money, but at the same time, is it something that we can change since it is such as integral part of the way we live?

[Kenneth Salas]

Unlike any other recessions presented in the Unites States in the past, the economic conditions after the stock-crash of 1929 were exacerbated by the substantial decline of consumer spending during the early 1930s. Olney agrees with Mishkin and Romer that the decline of spending on durable and semi-durable goods explains part of the 1930 drop of consumption. But she claims, the main contributor of the Great Depression was the decline of consumption of non-durable goods. Considering that American families were avoiding default on installment debt, supports Olney's argument that the only option for consumers was to cut spending on non-durable goods such as clothing, household operations, food, etc. The main contribution of Olney's article is not describing the initial causes of the Great Depression, but rather elaborating on the main factors that sustained and exacerbated the economic recession during the 1930s.

[Jun-An Chen]

This article taught me a lot; in fact, I didn’t know very much about the Great Depression, let alone the cause. The only thing I knew before reading this article was that a lot of people lost their jobs. As the use of installment plan become more popular and less “shameful” for the general public, there is an increase in debt in US. The most important thing I learned from this article is the different states of recession during the years of Great Depression. For example, the default rate is actually lower in 1930 than in 1938. The differences result from the severity and losses of the consequences of default. Families reconsider defaulting when they are faced with the high cost of default. In 1930, most families choose to cut back consumption and avoid default as much as possible. In 1938, when consequences are less severe, repossession rate increased as the option of default became more prominent.

[Christina Chander]

My favorite part of the article was the very beginning where Olney points out the similarity between the economic problems of the 1930’s and today. Every time I go home, I get a lecture from my father about how the American economy is going to hell because the ever increasing consumer and government debts. In response to Alexis, I don’t believe that spending on credit is something that can change in this country, though it desperately needs to. The in-debtedness of this country is disgusting and can only lead to economic problems, though on what scale it is difficult to determine. This aside, I found the article very interesting and actually learned something new: that a decline in consumption as a result of indebtedness and fear of default was a cause of the Great Depression.

[Stephanie Pai]

I find Olney's article very true. Ironically, we didn't learn from the past, especially in the case of the sub-prime mortgage crisis. The defaulting on loans that caused much of the economic turmoil in the late 20's and early 30's is similar to the defaulting of home loans today. Many Americans, eager to purchase a new home, often apply for easy loans. Like Olney mentioned in the article, "Authorities believed that 'easy credit' was creating a generation of 'deadbeats'." Most homeowners obtain loans under the variable interest rate because it is "easier to acquire". However, when interest rate inflate, mortgage interest rates also inflate. And recently, because of the increase in interest rates, many homeowners were unable to pay off their mortgage. Thus, many of them faced foreclosures. The problems that caused the economic turmoil in the 20's and 30's are still problems we face today - consumption and "easy-credit" loans. These two factors greatly influenced the recession of the 20's and 30's and even today. If Americans only reduced their consumption, then they wouldn't need to apply for loans, and then when interest rates increase, our economy will not face recession.

[Wing Ting Yim]

This article is very interesting and easy to read.
What Olney trying to say was about different default systems has different consequences to the whole market economy. She also used 1930 and 1938 years to compare how the different systems got the different results tothe economy. 1929 stock market crash heightened income uncertainty, wage cuts, layoffs, hours reduction, installment contracts, all of these are the main reason why families reduced consumption. She states that this is the only option (reduced consumption) to families in 1930. In 1938, some states noticed the importance of the default systems and they made some rules to protect the consumers. At that time, default less costly to consumers and they didn’t decrease consumption that much even there had another regression period in 1939.
This is the same thing happening to us nowadays. In September of this year, the stock market reached to a new low point due to the mortgage market. The stock market was very bad at that period, and what Federal Reserve did to help the market was to cut interest rate. When the interest rate is lower, it triggers investment and consumption. It really did help a lot on stock market and consumer has less concern about uncertainty problem.
Olney’s explanations were very clear, and I like how she used the table VI (Percentage decrease in consumption when a 10 % decrese in income is anticipated) to be an example. How much of a drop in aggregate consumption will avoilding default generate?

[Tanya Chang]

In her article, Olney discusses that the Great Depression was caused by indebtness from installment buying and the fear of default. I found this to be very interesting because I had always thought it was the increase of unemployment that caused the Great Depression. Rather, installment buying and the idea of credit led to the unemployment of many people who participated in the use of credit. Fear of default gave consumers only one choice, which was to reduce consumption. It is interesting to learn that problems with installment buying and credit started as early as the Great Depression. However, as history shows, we continue to have that problem today. Because credit is so heavily based in our consumer life today, will credit problems ever be solved? Or will we experience similar consequences as the people during the Great Depression.

[Alice Lin:19078943]

Olney mentioned that when the stock market crashed, the widespread of income uncertainty, the decrease in wages, and the increase in unemployment were important factors that led to the depression. She also discussed on the fact how the credit-financed boom of the 1920s led to the rapid decline in consumption during the 1930s because of consumers’ high debts and fear of spending. Essentially the cause for Great Depression is a series of chain effects starting from decreasing consumption, decreasing in income and lower wages for employees. However, if the Federal Reserve were to decrease the interest rate which will encourage consumption, would it have prevented such a long depression?

[Dragana Ognenovska]

Like most of the readers, I found this article to very insightful. I was not aware that the available mean of avoiding default was a reduction in consumption, which led to the Great Depression. I believed that it was solely due to the stock market crash that led to the Depression. I was also not aware that the reasons for the difference in how the first year of the recession turned out in 1929 in comparison to 1921 and 1938 was due to debt and in the case of 1938 that the penalties for default were not as harsh as were penalties for default in 1929. It was interesting to read this article because I began to see the cause of the Great Depression from a different point of view.

[Dragana Ognenovska]

Like most of the readers, I found this article to very insightful. I was not aware that the available mean of avoiding default was a reduction in consumption, which led to the Great Depression. I believed that it was solely due to the stock market crash that led to the Depression. I was also not aware that the reasons for the difference in how the first year of the recession turned out in 1929 in comparison to 1921 and 1938 was due to debt and in the case of 1938 that the penalties for default were not as harsh as were penalties for default in 1929. It was interesting to read this article because I began to see the cause of the Great Depression from a different point of view.

[Christina Chen]

I thought Marta Olney's artcle, "Avoiding Default: The Role of Credit in the Consumption Collapse of 1930" was a great article, that discussed the significant drop in consumption in the 1930s that ultimately devastated the American economy. Her analytical steps that document the progression of the stock market crash to the decrease in consumer spending, very clearly emphasizes the economic causes that led to the Great Depression. As many other student pointed out, Olney cleared up a previously well-thought conception that poor-credit problems led to the Great Depression. According to Olney, it appears that credit providers were the least affected by the Great Depression .Furthermore as several other commentors mentioned, this article reminded me as well of the all-too-familiar Keynesian model from Macroeconomics; one of the factors that contribute to economic growth is consumption. Therefore, Olney's linkage of lowered consumption to the Great Depression makes sense on a very fundamental macro-level.

[Ben Sumarnkant]

Olney’s article on Avoiding Default details what appears to be a paradox to us nowadays. The typical, uninformed perspective on the Great Depression would be that people lost their jobs, their money, and basically anything material. And although such a distilled view is not necessarily correct, Olney’s article brings to light the manner in which people lost their possessions. And in the case of 1930, when default was still costly, people didn’t even lose most of their material possessions. But despite keeping their big-ticket items such as automobiles and appliances, those who lived through the Depression nonetheless felt the money pinch when it came to consumption of nondurable goods.

[Kim Luong]

Coming from a background of US and global history, I was surprised to learn that debt and default played such a significant role during the Great Depression. Typically, we learn that overly high speculation and falling wages and prices were the main causes of a prolonged depression, a little of which was discussed in Olney’s very accessible article.
The notion that avoiding default (especially during 1930 when default policy was so stringent) by reducing consumption can so drastically affect the economy on a large scale is, although default and contract laws have changed a lot, still very relevant today.
While defaulting on credit had very poor consequences for 1930’s Americans, I wonder how later on so many more households decided that the cost of defaulting was less than the cost of their consumption once default policy loosened up a bit. If you think about today’s credit rules, interest rates and finance charges are still exorbitant and many people still succumb to the quicksand trap of debt. The cost and consequences of defaulting on credit (plummeting credit ratings and inability to obtain credit, which greatly reduces one’s future consumption) does not seem worth the trouble of a lack of planning and well-managed payment plans. This only shows how important credit education is, especially to students, new households, and other consumers who need to make large purchases on credit.

[Eric Hsiao]

Olney’s paper provides a concise overview of how and why reduced consumption lead to the Depression. As with the 2007 credit crisis, it seems that a lack of knowledge on the consumers part drove a majority of the over zealous borrowing. The consumer was, and as we recently realized still is, grossly misinformed about borrowing. It is interesting to see note that the government has yet to implement effective regulations that prevent lenders from leeching off the naivety of the average borrower. A quick google image search of subprime yields several advertisements (that are no longer hosted) enticing homeowners to refinance with “1% monthly payments”, with no mention that these payments increase substantially over time.