Reality check: The “stimulus” that President Obama will sign Monday is a band-aid. If Irving Fisher, who by some accounts was our finest American economist, was right, such a stimulus is useful in that it helps those who are unemployed and replaces some lost consumer spending; but the real work that must be done is to get the credit system flowing again. I don’t have the space to go into that economic debate tonight, but it is at the core of the problem. It is Keynes vs. Fisher, von Mises vs. Friedman. It is, as Lacy Hunt says, “The Grand Experiment.” After 70 years, we are going to see who is right. My money is on Fisher. It is not an experiment that is going to be fun to live through; but when we have the next debt deflation in 70 years or so, our grandchildren may know what to do.
We will see another stimulus package, probably by the end of the year. This time it will hopefully provide real stimulus. Much of the current version is simply an increase in federal spending that will be hard to rein in. And please, I am not being partisan. That is the analysis of many of Obama’s advisors. And it goes back to the debate I mentioned. Keynes would argue that it is in fact stimulus. The other three economists would have differing views. And like I said, in a few years we are going to know who was right.
But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of money to take over very large insolvent banks. Stay tuned.
From Rush Limbaugh:
“We were told that we were so near economic collapse, Congress had to approve the bill before they read it. Congress passed it on Friday. Did Obama sign it Friday night? No. On Saturday? No. We’re talking collapse here for heaven’s sake, but did he sign it on Sunday and save America on Sunday? No. How about today? No.”
One year ago housing was over-bought. No big deal – happens periodically. Today, after 4 or 5 massive stimulus bills, we have a full-blown recession.
Anyone at all curious as to how we got here? Perhaps it is unimportant…..
Don
What, exactly, is the problem with tax cuts that keep more money in the hands of American consumers? Why do I need D.C. to keep taking my money just to give it to someone else?
Oh. Wait. We’re talking about Democrats. My bad.
A recession was inevitable given the overinflated housing market. We’ve been through them before. 1949 was worse. Why now an existential depression?
Rahm Emanuel:
[b]”You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.â€[/b]
Saving the economy is not the goal of this congress and administration.
The irony is that it is not even clear “Keynes” would entirely regard this bill as stimulus. Harvard economist Greg Mankiw has an exceptional blog in which he points out a distinction between what everyone thinks is “Keynes” and “mature Keynes”. In a way “everyone” is correct – for most of his life/career Keynes was big on the role of government, government spending, and the priority of fiscal policy.
But even fans of “Keynesian economics” fail to note that the last few years of his life/career he made some important shifts. And began to acknowledge the importance of tax cuts (rate cuts not just rebates) and monetary policy. No not entirely Fisher-Friedman stuff. But much closer thereto.