Seventy-nine years ago the crash of Black Monday and Black Tuesday on October 28–29, 1929, cut stock prices by 23 percent. Economists now generally consider the misguided monetary and fiscal policies that followed (tightening on both counts) the cause of the Great Depression, not the stock market crash (which eventually cut stock prices 89 percent from their peak). Hopefully, we are not embarking at present on a controlled experiment to see whether they have been right. There could be a significant market recovery by end-2009 if mainstream earnings projections are achieved and price-earnings ratios return to more normal levels.

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Suddenly people are worrying about deflation risks to the US economy. While the Fed was quite right to set aside inflation concerns when it lowered its benchmark interest rate this week, recent data on the outlook and the global slowdown does not indicate that we are at risk of deflation. It is unrealistic to think that we are.

First, asset price declines—even large and widespread ones as in US housing markets—almost never result in broader price declines. As I demonstrated in a paper [pdf], the bursting of only 2 out of 44 stock or real estate bubbles led to instances of consumer price index (CPI) deflation (and 16 out of 18 prior episodes of deflation in advanced economies were not preceded or accompanied by asset price busts).

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On October 14, 2008, I wrote a piece “Making the World Safe for Sovereign Wealth Funds” on the release of the “Santiago Principles” (Generally Accepted Principles and Practices [GAPP]) by International Working Group (IWG) of Sovereign Wealth Funds (SWFs) on October 11.

At the end of my piece, I expressed concern that the members of the OECD—the organization of the world’s leading democracies and market economies and, as such, the group representing the views of the recipients of many SWF investments—had not adopted sufficient reciprocal measures to support the openness of international investment. OECD officials subsequently sent me information about OECD guidance on SWF investments. Most of that information was previously available. However, the actions with respect to accountability for decisions and the decision-making process were agreed only on October 8 and had not been highlighted. The OECD communication is reproduced below, followed by my additional observations.

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The International Monetary Fund (IMF) has suddenly reopened a traditional line of business: large-scale lending programs (Iceland, Ukraine, Hungary, Pakistan, and counting). As global recession spreads across the world and increases in virulence, the Fund likely will be lending again for years. Simultaneously, talk has shifted from the world economy not needing the IMF as an international lending institution any more to the IMF not having enough resources to lend and make a difference. The first view was wrong, and the second view is wrong.

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One may regard it as a mistake to convene a conference that is widely described as Bretton Woods II without the two years plus of preparation that preceded Bretton Woods I in 1944. But the die has now been cast, and the leaders of the G-20 countries are going to convene shortly in the first stage of what is widely described as Bretton Woods II. That being so, it behooves those of us interested in the topic to suggest the agenda that they should pursue.

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