I wish that I believed that a giant government spending stimulus would work to fix things,

because I would then support it, and with vigor.

Anyone who says that they have ‘computed’ how do to a stimulus is believing too much in a dodgy model.  Anyone who says ‘Nixon said that we are all Keynesians now’ in order to justify this  spending package is 30 years out of date.

We need to fix our banking system.  That likely involves building new financial institutions-or at least letting the dinosaurs die.

Our problem now is that everyone wants to invest ‘risk-free,’ so savings are going into cash, bank accounts, and government bonds and not being used for business investment or  consumer spending.   But in aggregate it is impossible for all this to really be ‘risk-free’ investment and instead is leading less production, investment, and consumption today.  Real physical investments are risky.  My guess is that once people start recognizing the inflation risk in cash, bank accounts, and government bonds, then capital will flow to businesses and eventually to consumers, and we will start to slowly recover.

The best the government can do now is to help the most economically vulnerable people quickly, and work on rebuilding financial institutions; not necessarily rebuilding the financial institutions that brought us here, either.

Increasing the money supply is eventually going to make it evident that money not intermediated into real investments is simply a waste.  Then people will spend on current consumption and start to invest in real physical projects again.

I should add that investing in public goods-if they have real economic value-is a perfectly sensible thing to do.  But it is not stimulus.

Explore posts in the same categories: macro

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