[larryfreeman]

I think that someone can have a meaningful discussion on recessions without mentioning the "dismal failures" of the Keynsians.

For the record, there are plenty of bubbles that have not been caused by government manipulation. For example, the Tulip bubble that happened in the Netherlands (http://en.wikipedia.org/wiki/Tulipmania) (not to mention bubbles caused by people like Madoff and other con men).

Also be careful. The government is always involved with any economic crisis and you can always blame a government action for making a bubble worse. If you believe that without a doubt the government is the cause of all bubbles, then no one will ever "prove" you wrong. If you are open minded and use the simplest explanation for a given set of facts (i.e., Occam's Razor), then you will find that not all bubbles have happened because of government manipulation.

[kiba]

Some people still say that the tulipmania is government's fault.

http://mises.org/story/2564

The story of Tulipmania is not only about tulips and their price movements, and certainly studying the "fundamentals of the tulip market" does not explain the occurrence of this speculative bubble. The price of tulips only served as a manifestation of the end result of a government policy that expanded the quantity of money and thus fostered an environment for speculation and malinvestment. This scenario has been played out over and over throughout history.

[hristov]

Sorry this does not show that it was the governments fault. This shows that the money supply in the Netherlands was essentially based on precious metals without any government involvement. The only thing the bank of Amsterdam did was keep the gold and silver in a central place and issue a receipt for it, so that people could more easily trade with the receipts rather than the actual gold. In fact this situation is pretty close to the gold standard that Chicago school people yearn about. Thus, any increase of the money supply was caused by the free market for precious metals not due to any govt involvement. So it is not "the government's fault."

Also the tulip mania cannot be explained by an increase of money supply. If that is the reason than why only tulips? If there is inflation and the market behaves efficiently and rationally everything should have gone up in price not only tulips. Why for example did one contemporary state that tulips became more expensive than the ground they were grown in? If the only reason is inflation, than the ground the tulips were grown on would increase in price proportionally to the tulips.

[larryfreeman]

Thanks for the link. Interesting analysis.

Still, I think it proves my point that you can always blame the government if you want to.

In my view, the reasoning has one major flaw. If money supply was the cause, then why weren't there other bubbles in addition to tulipmania?

If you correctly identify the cause, then it should be both sufficient and necessary for the result. If the cause was the Dutch monetary policy, then there should have been other bubbles contemporary with the monetary policy.

As far as I understand it, the tulipmania did not cause a recession or depression even if some very rich people lost all their money. If the author's reasoning was correct, then there should have been other bubbles caused by the same government policy.

[kiba]

Do you mean by this?

But what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite. As kings throughout Europe debased their currencies, through clipping, sweating or by decree, the Dutch provided a sound money policy, which called for money to be backed one hundred per cent by specie. This policy, combined with the occasional seizure of bullion and coin from Spanish ships on the high seas, served to attract coin and bullion from throughout the world.

I do not know of any more of this monetary policy implemented. Perhaps you could illustrate some examples from history.

[yummyfajitas]

The tech bubble (1995-2000) might be a better example of a bubble not created by the government.

Nevertheless, I think it's fair to say the government did play a major role in the housing bubble.