John Kenneth Galbraith was a prominent Keynesian economist who served in 4 Democratic administrations: FDR, Truman, Kennedy, and Johnson. I have previously read Galbraith's The Economics of Innocent Fraud and have wanted to read his The Great Crash, 1929, but in the wake of the latest bubble bursting episode, this seemed like an important work to read.
In A Short History of Financial Euphoria, Galbraith looks at bubbles throughout the centuries to determine the common factors in all bubbles.
The Common Factors:
- People and institutions are desirous of accruing wealth;
- Intelligence is tied to wealth, and the wealthy are considered specially insightful;
- Following the "insight" of the wealthy, values of commodities are increased through bidding;
- The growth of the bubble confirms group intelligence and stimulates more speculation;
- The crash;
- Assessing and placing blame.
For Galbraith, self-delusion draws people into a speculative frenzy. This delusion - this madness - cannot be legislated against; there is no policy to defend against it:
Regulation outlawing financial incredulity or mass euphoria is not a practical possibility.
While Galbraith accepts the growth and bursting of bubbles as part of the market, he does not, believe that bubbles are a benign part of the business cycle. And because it cannot be defended against, the only thing that can be done is to mitigate the effects of the crash:
A welfare system, farm-income supports in what was no longer a predominately agricultural economy, trade-union support to wages, deposit insurance for banks (and similarly for the S&Ls), and a broad Keynesian commitment by the government to sustain economic activity - things all absent after the 1929 crash - had lent a resilience to the economy.
Of course, there will continue to be debate over whether such policies mitigate or lengthen recessions/depressions.