Mario Rizzo, over at ThinkMarkets, writes much good sense about Keynesian economics and fiscal “stimulus.” Here’s his penultimate paragraph:
The root of the policy problem is that the “Keynesian” solution takes the simple aggregate demand model too seriously. It proceeds as though sectoral imbalances don’t matter. In this view, the current situation is not a coordination problem but some kind of confidence problem that leads to a deficiency of demand in general. The theory is inadequate and thus so is the solution.
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Exactly. It amazes me that more do not understand the problem. Having only begun to study macroeconomics recently, I feel as though I have stumbled into a geology department and been told that the earth is flat. It seems almost scandalous. I find myself thinking things like, 'did Russ and Don know about this all along? Why didn't they say anything!'
I'm going to have to read Mario Rizzo more often.
I don't know how much longer the economy in general and employers in particular can take the Keynesian "solution" to this recession.
Prof Rizzo has put his finger on what this is all about, the assumption that this is a crisis of confidence, rather than bad policy, and that we need even more bad policy to restore confidence in the prior bad policy.
We don't need confidence in bad policy at all. The only conficence we need is in good policy, in the free market, sound money, the right of private property, and the sanctity of contracts.
Now all Dr. Rizzo has to do is get Keynesians to take his concerns and critiques a little more seriously.
Outstanding piece. This is incredibly important:
[my emphasis]
This is literally how these people “think;” Gee, if we just put the money out there, it'll get to work, mostly thru lending. [BZZZ] Wrong.
[See also "We need stimulus with no pork"]
A) Is not one of the major lessons of this whole episode that banks were undercapitalized? Especially given the amount and number of risky loans? Do you think banks are a little gun shy about lending now? Where do you think that money is going? Possibly to recapitalize?
B) Was not the federal government directing banks to lend in this manner? What makes you think they (government) will not repeat this mistake, or make an even larger one now?
Some of this problem goes away if (when) banks become fully nationalized, so then they can play by the same spending rules as government, i.e. there aren't any.
More importantly, it risks creating another lending crisis. Aren't we supposed to fix this one first?
If this truly is an age of change, we can start right now by putting Barney Frank And Richard Syron* in jail.
[*Richard Syron was head of FRB Boston during the above referenced document outlining relaxed lending standards, and he later became head of Freddie Mac. From Wikipedia: "In 2004, David Andrukonis, the chief risk officer of Freddie Mac, warned (then Chairman & CEO) Syron of increasing risk in Freddie Mac's portfolio. Syron declined to act." I recommend everyone read that doc.]
Confidence will not be restored until both investors and producers are certain there will be no benchmark-shaking tremors in the money supply.
You can't drop $800B worth of rocks in a lake and NOT change the water level.
Our present policy seems to be throwing more pebbles at the ripples to make the waves stop.
I didn't see anything in the article about devaluing the currency and the ill that will cause here and abroad.
Seems like this is the only way this can all work is if everyone buys our all the bonds we float till we get the econ up and running.
did Keynes explore this as an option in some writing or is that just a twist on the idea of Govt finding the device to get the funds to spend the $s
Economics has never recovered from the massively influential fallacies of Foster & Catchings, which went mainstream in the 1920s in both academic economics and in politic, advocated by Hoover, Roosevelt, and Sen. Wagner. Keynes is just a Marshallian version of the original Foster & Catchings fallacy.