I’ve been meaning to write a post about this, but Caroline Baum has written many of the same points I had in a piece for Bloomberg called “Economic Cures Are Like Booze for an Alcoholic”.
“…the U.S. economy was buckling under the weight of the burst housing bubble. The blame game was in full swing, with the villains ranging from Alan Greenspan and his easy money policies to consumers borrowing and spending beyond their means to financial institutions enabling profligate spending to a misallocation of capital to housing.
Fast forward one year, the crisis is still going strong, the villains are still under attack, yet something curious has happened: The policies and actions responsible for the economy’s illness are now being prescribed as cures…”
“President Barack Obama’s crack economics team, including Larry Summers and Christina Romer, and Fed officials from Ben Bernanke on down have to understand that the problem of too much leverage can’t be fixed with more borrowing; that a misallocation of capital to housing can’t be cured with incentives to buy more homes; that consumers (and the nation) can’t spend their way to prosperity.
At least I hope they do.”
Me too. Mr O is doing a number of positive things. For example, I’m very happy with things like a commitment to openness ethics rules. However, I’m not so happy with some of the economic plans floated. To me, the issues we are facing today are primarily a result of excess. The US economy has lurched from bubble to bubble. Our last one was driven by cheap credit and underestimating risk. Now the markets are correcting for that. Profits will not quickly return to their same levels as before, because companies will not be able to leverage on that scale again and the US consumer is still over leveraged.
Keynesian economists are arguing that it is possible to spend and stimulate our way out of a recession, and then before inflation decimates the economy we can return to fiscal prudence. There are several issues with this plan. One, excessive spending caused the boom and bust – we can’t just continue to create bubbles indefinitely. If stimulus could create permanent jobs, then why not triple or quadruple it and eliminate unemployment forever? It just doesn’t work that way – we would be in ruins and the cost of servicing our debt would be massive. The second hole is with regards to timing – I have very little faith that any institution would be able to accurately time inflation and adjust accordingly. History agrees.
There are also those out there that believe the US govt does not even have the capital to “save” the markets, even with ridiculous creation schemes. I on the other hand believe that they can come up with enough crazy Zimbabwean monetary policies to get the cash, regardless of the long term effects on our currency and long term wealth. Sadly inflation is a very tempting end result for a large debtor nation like the USA.
If you want to hear just how silly this all sounds, watch this video of Fred on the economy.