Eugene Fama gets at the real issue

Bailouts and Stimulus Plans – Addendum 1/28/09 – Fama/French Forum
Again, here is my argument in three sentences.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when [...]

Although I am not ‘pro-stimulus’

I am in favor of spending government money right now.  I think that simply giving a check to everyone with income below some threshold is the right thing to do, right now.
The devil is in the details–how big a check and what threshold?
Perhaps you want to slowly phase out the payment so there is not [...]

Iliquid versus insolvent

Here is an example to explain illiquidity versus insolvency.
You have an asset that has cash flows of 0.5 today and 1.0 in one year.
Ignore interest rates.  The asset is worth 0.5 + 1.0=1.5
You are illiquid if you have a loan with a payment of 1.10 today–you only have 0.5 cash to pay off your loan, [...]

I can’t resist

The prominent Keynesians are pretending that they don’t understand the basic resource constraints, or that resources are free on the margin, so that the government can reallocate with little cost.
The prominent non-Keynesians are viewing resources as costly, and claiming that the resource constraints bind, but also pretending that there are no frictions that the stimulus [...]

Worth reading

Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?

Keynes as Public Works Skeptic « ThinkMarkets
I say it again: I believe that many of the people wanting fiscal stimulus want it for reasons other than fiscal stimulus. Fair enough–maybe we do need better infrastructure, etc. etc, but calling it stimulus is going to be costly in the [...]

Quantitative Easing

winterspeak.com: You must be Brave or Foolish to go against UChicago econ
Finally, Robert Lucas. Lucas at least includes price and velocity — thank you for that! — but again misses the key element:
MV = Py
Given that V is going to zero (as people demand more savings) you need to increase M by a large amount [...]

Here is how I think the fiscal stimulus should be analyzed

TRUTH ON THE MARKET » Kevin Murphy models the stimulus–and the results aren’t pretty
At bottom, Murphy has this equation (I don’t know how to write Greek letters in WordPress, so bear with me):
[added by me: the left hand side should be bigger for the stimulus to make sense]
f(1-L) > a+d
f = how much comes out [...]

Never trust the headlines…

Interesting comparisons | Free exchange | Economist.com
Will things get a lot worse? Of course they could. But the financial market’s key leading indicators—stocks, corporate bond spreads, and the money supply—have all turned upward. With luck, that suggests we could be out of the depression by the second half of next year. To be sure, that [...]