John Maynard Keynes’s Private Letter to Franklin Delano Roosevelt of February 1, 1938

In which Keynes begs Roosevelt to undertake some real stimulative Keynesian policies--rather than merely the macroeconomic weak toast that was the New Deal:

John Maynard Keynes’s Private Letter to Franklin Delano Roosevelt of February 1, 1938

Also: Keynes urges Roosevelt to stop the deck chair-rearranging that was poorly thought-out structural reform--NIRA, PUHCA, anti-business rhetoric, et cetera.

Comments

[tomrus]

cc: Sen. B Obama

[joel]

"Housing is by far the best aid to recovery because of the large and continuing scale of potential demand; because of the wide geographical distribution of this demand; and because the sources of its finance are largely independent of the stock exchanges. I should advise putting most of your eggs in this basket, caring about this more than about anything, and making absolutely sure that they are being hatched without delay."

I'm actually going to step out on a limb here and suggest we ignore this part of Keynes's advice. Radical, I know. I am unsophisticated in the ways of economics, but even in my unsophistication I am quite certain that putting a lot of new money into home construction and easing home lending credit lines would perhaps not be our wisest course of action at present.

Also, it is no longer true of our economy that "the sources of [housing] finance are largely independent of the stock exchanges" thanks to bank consolidations, banks-as-public-corporations, and the securitization of mortgages.

In fact, one could make a decent argument that we followed Keynes's advice re housing to get ourselves out of the last recession, and while we had a nice 5-6 year run of it, in retrospect it has perhaps not been entirely successful in the longer run.

[SvN]

There's a recent IMF WP by Claessens, Kose, and Terrones, "What Happens During Recessions, Crunches, and Busts?" that seems to support Keynes and the first comment, above.

In it, the authors simply group together recessions (post-1960) from developed countries and study the impact of credit crunches, housing busts and stock market crashes on output and employment. Of the three, stock market crashes seems to have the smallest real effects (esp. on employment) while housing market collapses have the largest.

I'm wondering whether this is because of the profound effect of the housing sector on aggregate demand. This would justify Keynes' argument to stimulate housing demand to help offset the stock market collapse(s). It would also imply that, if this avenue will not work in the present crisis, we should expect the economic impacts to be more severe (or else policy needs to be more stimulative since it has less leverage.)

[Neal]

"Home ownership" was pushed beyond sustainable levels in recent years, so that horse is dead.

Alternative and "green" energy and associated technology are the obvious substitute for utilities in the letter. But this does not have the widespread job-creation and money churn that housing provided.

It is difficult to see where the great re-expansion of the consumer, ala post-WW2, will come from, especially when the imposed expansion forces of WW2 are not present.

The comparative advantages of the US in the global economy are far fewer and much less obvious than after WW2.

Times change, after all.

_______

And on the pedestal these words appear:
'My name is Ozymandias, King of Kings;
Look on my works. Ye Mighty, and despair!'
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
_________

[joe magner]

Interesting, I just heard the Q&A from the Obama-Richardson appointment, and I think housing just might be a big issue and not a dead horse as stated in a comment previously......but form a different point of view.

Many of those recently purchase homes could become delinquent mortgages at a level that would be a problem.

It is very difficult to become a performing member of a community when one is preoccupided with keeping a roof over one and one's family's heads that is stable and has a real physical address.

As an employer wants to hiring someone with a permenent address of residence and not a P.O. box, sleeping in a car or truck or RV or in a tent just doesnt cut it for a decent job other then washing dishes.

We are in a housing crisis because of the need to push mortgages to liquify the economy and we are going to pay for that soon. Do you really own your own home if you can not make the payments? And if the CMO's ect have so confused who the title holder of the property is then in some weird way the person/family living in the house is a squater.......in the 21st century way.

So there really is a housing problem and the horse is only sleeping and not dead.

[joel]

Well, I do realize that my unsophisticated view of economics is frequently at odds with established economic orthodoxy, but I am not yet certain whether that is a feature or a bug.

However, I do know that in 1940 the home ownership rate was about 44% and in 2000 the home ownership rate was about 66%. (I know this because I looked it up here: http://www.census.gov/hhes/www/housing/census/historic/owner.html).

That suggests to me that an economic sector that represented a huge, untapped area ripe for expansion in 1940 is no longer huge or untapped, and thus represents shrinking possibilities for growth.

It is no criticism of Keynes to suggest that his housing prescription is of less use today precisely because we successfully followed his advice for decades and have now reached a point of diminishing returns (or worse).

"It would also imply that, if this avenue will not work in the present crisis, we should expect the economic impacts to be more severe."

Oh, I'm wholeheartedly in agreement with you on that one.

[joe magner]

ah yes - the home ownership rates are high..by census figures. i wonder how many and how much of the mortgage is left......at the years stated.

from the census page:
http://www.census.gov/hhes/www/housing/census/historic/owner.html

Home Ownership Rates:
2000 66.2%
1990 64.2%
1980 64.4%
1970 62.9%
1960 61.9%
1950 55.0%
1940 43.6%
1930 47.8%
1920 45.6%
1910 45.9%
1900 46.5%

I like the drop between 1940 and 1930 which would include the depression times. It would be nice to have the figures in between the decades but the drop from 47.8% in 1930 to 43.6% in 1940 would be of some significance. It is only a drop of 4.2% but also doesnt inlude the very bad years as by 1940 WWII stimulus was beginning to bloom and the recovery was on its way. Also, 1930 was just the beginning of the bad years and the market dropped through 1930 but was not at the bottom yet. By 1940 the market had recovered a good chuck of its loss and then proceeded to climb from 1940 on ecept for the 1942 or 43 slump.

I wonder how many lost their homes during the depression years......could that be partly the problem?

It is also interesting to compare those years of growth between 1940 and 1960 - a big jump of 18.3% - to the income taxe rates and the amount of progressing in those taxes years. I seem to remember the taxe cuts at the upper end began towards the end of the 60's. can anybody comment on taxe rates during the growth period of housing ownership?

I am no economist - more of a physics-electronics-engineer who likes to understand the world around me.