Uncle Miltie vs John Maynard Keynes

Often, BR discussions have fluctuated about the remedies for the current financial crisis. The arguments seem endless, but then the problems are huge. And, properly, I think, they surround real concerns about massive government deficits and massive injections of liquidity.

One place for some perspective is the June 11, issue of the New York Review of Books which has discussions among seven top economists including “Dr. Doom” Nouriel Roubini of New York University and Paul Krugman, of Princeton and The New York Times.

I found some of the most insightful contributions coming from Niall Ferguson, a Harvard historian. As he puts it — and this explains the confounding elements of the crisis as alluded to by BR bloggers — there are two completely contradictory remedies being put in effect at the same time.

One is the free market prescription of the late Milton Friedman who might have urged massive amounts of capital from the Federal Reserve to keep the banking crisis from going Great Depressional. At the same time however, the government is going about a good old John Maynard Keynes solution — massive fiscal deficits in excess of 12 percent of GDP to pump prime the economy.

“There is a clear contradiction between these two policies and we’re trying to have it both ways,” Ferguson says. “You can’t be a monetarist and Keynesian simultaneously — at least I can’t see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive the interest rates up.”

Indeed, the negatives stemming from this two-faced recovery policy might have slunk along OK if the financial credibility of the U.S. isn’t tarnished. But it is fast becoming not the case. China used to scarf up all the T-bills we could issue but, as Ferguson notes, “the marriage between China and America is coming to an end. Maybe it’s going to end in a messy divorce.”

Other participants in the published discussion bring on their own perspectives, but I think Ferguson nails it. Finance guru George Soros adds to the contradictions idea by saying, “The interesting thing is that what needs to be done in the short term is almost exactly the opposite of what needs to be done in the long term.”
Maybe that’s why I can’t really tell much difference between the policies of Bush-Paulson-Bernanke and Obama-Geithner-Bernanke. I find it amusing how so many Republicans trash Obama for continuing the very same policies they voted for last fall. And I find it amusing that Democrats continue to trash Bush-Cheney when they go along with Obama’s very similar approach. It could be that nobody knows the answer.

BR bloggers have gone through a litany of causes. I think it was Groveton who said, “Fed, Fed, Fed” and he’s probably right, right, right. Alan Greenspan, the deity loved by all sides of the aisle, gave us tons of cheap money by pretending to fight a phantom inflation. The SEC helped by letting banks leverage themselves by three times what they were allowed to do. Fannie and Freddie played a role as did subprime, Wachovia, Countrywide, etc.

As for me, I remember when I took Econ 101 back in the early 1970s, the orthodoxy at most liberal Northeastern uni verities was that Keynes is OK, deficits don’t matter. Within a decade Uncle Miltie had changed every one’s tune, especially after the big, deficit-generated inflation rates of the 1970s that only Paul Volcker could cure. Now, the free market Milties have run their course. No one seems to know what’s next. And we’re stuck with a weird hybrid of both men’s policies.

Peter Galuszka

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37 responses to “Uncle Miltie vs John Maynard Keynes”

  1. Larry G Avatar
    Larry G

    this is why I keep asking the hand-wringing for Obama but not Bush crowd to give us the non-political folks they are listening to.

    I could even accept economists that are opposed to the current path..but it would seem to me that they would have been opposed to the same approach by Bush also…

    but that’s ok.. give me the short list then….and what the alternative path is that they recommend.

    but finger-wagging lectures from the same politicos who swear that Bush is a poor misunderstood bystander thrown under the bus by a a ticking-time-bomb set by the Dems back in Clinton’s term…

    it’s like these guys have been on a dessert island for the last 8 years…

    they’ve literally lost 8 years of memory from their minds…

    talk about your one-trick ponies…. sheeesh…

    I don’t know what the right answer is.. and yes I’m soberly aware of the downstream implications of our current path… but until and unless I hear a strong and vocal chorus of mainline economists saying “stop stop..this is insane”..

    then I’m going to be not so comforted by the same phrase coming from those who have been and continue to be “let the market work” lovers.

    We have a perfect example by the way.

    We have a little government agency called the FDIC – which ironically was created by the same Glass-Steagall Act that other portions of were gutted by Phil Graham and company.

    What if we had repealed the FDIC at the same time?

    So Groveton.

    In addition to Fed Fed Fed..

    should it be “get rid of the FDIC while we’re at it”?

    after all.. it’s a government agency run by bean-counters who don’t know anything about how to run a business.. mucking up businesses…

    right?

  2. James A. Bacon Avatar
    James A. Bacon

    I’m pinching myself because I’m actually agreeing with Peter here. The U.S. is pursuing Keynesian and Friedmanite policies simultaneously. It will come to no good end.

    Historians will look back upon this time as the Bush/Obama era, in which both presidents (and their supporting parties) pursued very similar economic policies, differing mainly in style, not substance. Both presidents will be blamed for the stagflation to come, which, combined with the entitlements crisis (which they both will have contributed to by expanding health care benefits), will result in the insolvency of the federal government and the unbelievable damage globally that ensues.

  3. James A. Bacon Avatar
    James A. Bacon

    Larry, get over the fact that the GOP is blaming Obama for the mess we’re in. The Dems blame Bush. Waaah. They’re both right, and both beside the point. What we’re experiencing is the collapse of a philosophy of governance shared by both parties, the governing classes generally, the media and for the most part the American public since World War II. That philosophy is rapidly unraveling.

  4. Gooze Views Avatar
    Gooze Views

    Oh, and by the way, you mullahs among the BR blog crowd might notice that I ran photos of both Milton Friedman and John Maynard Keynes FULLY CLOTHED. To do otherwise would be horrible.

    Peter Galuszka

  5. Larry G Avatar
    Larry G

    well you’re right about the blame game….

    but my complaint is more focused on how we go forward….

    it’s true we are exercising opposing economic philosophies but not at the same point in time.

    I think the big unanswered question is … how much money the government needs to spend right now to rescue the economy.

    …knowing full well..that no matter what amount is agreed to..that we’re going to pay for it down stream….

    … did my county NEED to receive more than 50 million dollars in stimulus money?

    http://tinyurl.com/qcx8bb

    did we really need to build two more roads … and who is going to pay the 50+million back?

    ( will it be all Virginians so that Spotsy comes out ahead?)

    I have the same concerns..

    but on the other side… some economists are saying that if we don’t do this – we will likely see unemployment levels approaching 20% and the very real prospect of a depression.

    so.. I’m caught on who to believe.

    do I think our political friends on the right side of the aisle understand the economy and have the right solutions?

    ha ha ha ha ha ha ha ha ha

    do I believe Obama and the Dems – well no… but then we know how the Dems deal with stuff like this and we can..afterall believe them such as it is…

    but believe the Pachyderms about the “terrible” deficit and “stealing from future generations” and all that rot?

    well.. no.. cuz that’s pretty much what they’ve been saying for 8 years and they remind me of the folks who inhabited Gilligan’s Island – sorta normal looking .. but deeply flawed when it came to dealing with realities.

  6. Groveton Avatar
    Groveton

    Your best post ever (and you’ve posted quite a few good articles). I think the bloggers here need a reading list on economics. It would certainly help me. There are plenty of books that document the current crisis – usually with a strong political slant – one way or the other. Does anybody know of a readable book that explains the core concepts of economics. Not the Econ 201 and Econ 202 textbooks but a book that methodically walks the reader through the major concepts. My “acid test” foe such a book would be money supply. I have never seen such a book but that certainly doesn’t mean there isn’t such a book.

  7. dkuehn Avatar

    Groveton –
    RE: “your best post ever”

    No, sorry. I normally like Peter’s posts a lot, but this was certainly not his best post, and it bordered on misleading.

    You quote Ferguson’s views on the contradiction of monetary and fiscal policy, and then just say “other participants in the published discussion bring on their own perspectives” and leave it at that!?!?!?! Why didn’t you see fit to actually provide Krugman’s Keynesian response – that these two aren’t contradictory because (at least according to the Keynesian story) because we’re in a liquidity trap with excessive saving relative to desired investment, such that increased federal borrowing can’t pose a large risk of higher interest rates.

    The war between monetarists and Keynesians is a hugely false dichotomy. Some battles are still being fought out, but to a large extent there is a new Keynesian synthesis now that embraces both views. Needless to say, the real debate isn’t the caricature that Peter presents of a battle between “free market” monetarists and big spending Keynesians.

    You don’t remember your Keynes very well if you think he said deficits don’t matter. Keynes advocated deficits in the special case of a liquidity trap during a deflationary recession. Let’s please put the mythical Keynes to rest and engage the real issues at hand. A good start would be to present Krugman’s rebuttal rather than assume that Ferguson accurately described the issue at hand.

    It’s OK not to be a Keynesian – but don’t argue against Keynesianism by knocking down strawmen like this or a priori assuming Ferguson’s understanding of the current state of credit markets. I like Ferguson a lot, but you’ve really presented a distorted picture of the exchange here. Most accounts of this NYRB forum are focusing on the Ferguson point and the Krugman counterpoint, not pretending that it was a resounding endorsement of the incompatibility of monetary and fiscal policy.

  8. Gooze Views Avatar
    Gooze Views

    Mr. Dkeuhn,
    In response:

    I didn’t get into Krugman because I didn’t have the space and I did link the NYRB article to him. I thnk Ferguson laid out the tension very well. I like Krugman but find him extremely overexposed and sometimes tiresome. My judgment. My call.

    Secondly, deficits do lead to inflation.

    I don’t know my Keynes very well. Perhaps, but maybe it was those 24-year-old teaching assistants who said that deficits don’t matter. I’ll have to go back to John Maynard.

    Please keep in mind that blogging is to give a spark to ideas and let people know where to go if they want to learn more. It isn’t to write a master thesis.

    Peter Galuszka

  9. Larry G Avatar
    Larry G

    … ” ..because we’re in a liquidity trap”

    okay… now for the folks who think we’re spending way too much money and creating a huge downstream inflation potential…

    what is your opinion of of current spending efforts with regard to said “liquidity trap”?

    Is the current approach – a conscious strategy to mitigate/avoid the liquidity trap or not?

  10. Jonathan Avatar
    Jonathan

    Judge Richard Posner just published The Crisis of 2008 and the Decent into Depression.

    Bush and Greenspan do not go unscathed.
    http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1243476792&sr=8-1

  11. dkuehn Avatar

    Larry G –
    I’m not even 100% convinced that we’re in a liquidity trap, but I think you can make a really good case that we are. The current combinaation of monetary expansion and fiscal policy is meant to get out of it (or avoid it). Between some inflation and a liquidity trap, I don’t know anyone who actually believes/knows that liquidity traps are possible who wouldn’t err on the side of some inflation.

    Peter –
    It doesn’t have to be a master thesis, I just didn’t think it very well represented the issues that were actually discussed in the forum, and it did a disservice to both Keynes and Friedman by oversimplifying their positions.

  12. Gooze Views Avatar
    Gooze Views

    Dkuehn,
    Well, I don’t think you did a very good job of discussing Krugman, either, having gone back to re-read it. He talks of the government filling an investment void left by business. But he doesn’t take the argument much further than that. Are we readng the same piece?

    Peter Galuszka

  13. Larry G Avatar
    Larry G

    I found this WIKI entry to be helpful in better understanding what blogger Dkuehn was espousing.

    http://en.wikipedia.org/wiki/Liquidity_trap

    In a nutshell.. it says that in some economic circumstances, it may require the government to put lots of money into the economy to keep it essentially from failing.

    We can and will argue about the merits of that kind of circumstance….

    but what I am asking… in the bigger picture here is…

    this:

    Are the folks in the Obama Administration who are working this issue…proceeding along the lines of what is said to be the antidote to a potential “Liquidity Trap”?

    In other words, are they following a specific strategy espoused by at least some economists….

    and that policy essentially requires dumping large quantities of money into the economy in the short term knowing full well that there will be a subsequent inflationary price to pay – longer term?

    The folks who are hammering on the Obama Administration..it appears to me that they are not commenting on the strategy itself – at all – but rather wringing their hands over the deficit spending… as “too much” without ever acknowledging that at least in some economists eyes that the Administration is indeed following a very specific – legitimate – strategy.

    So the folks won are opposed… what are they opposing?

    Are they opposing the strategy itself?

    and if they are – are they opposing it on POLITICAL grounds or monetary/fiscal grounds?

    it appears to me… that the essence of the political opposition is essentially …political rather than economic…

    no?

  14. I also read the WIKI entry on a liquidity trap….

    “John Maynard Keynes is usually seen as the inventor of the liquidity-trap theory. In his view, financial actors fear the possibility of suffering capital losses on non-money assets and thus hold money (liquid assets) instead. For example, the fear of default on loans can inhibit lenders from lending except to extremely credit-worthy customers. These fears are most likely after a financial crisis such as that associated with the Stock Market Crash of 1929”

    So…to put that in today’s perspective….we bail the banks out with taxpayer money and what do they do?

    They horde money to prop up their balance sheets so it appears they are doing better than they really are…among other things.

    Not sure where that falls on the political spectrum….I guess time will tell.

  15. Daniel Avatar

    Peter –
    As long as you’re reading your own link, we are reading the same piece. Krugman’s third and fourth paragraph are why virtually every mainstream economist – even conservative ones – think there should be some kind of fiscal stimulus as well as a monetary stimulus. With all due respect to Mr. Ferguson, he’s a historian, not an economist. His argument that the two are contradictory just plain doesn’t reflect the consensus. Now, there’s lots of room to argue that the type of fiscal stimulus we’re pursuing is inappropriate – but deficit spending in general, in combination with monetary expansion, is the textbook response when inflation is so low and production is falling so steeply. And note – inflation is STILL incredibly low, despite the large spike in the money supply thanks to Bernanke… imagine where it would be if he hadn’t increased the money supply.

    Larry G –
    RE: “policy essentially requires dumping large quantities of money into the economy in the short term knowing full well that there will be a subsequent inflationary price to pay – longer term?”

    This is something we should definitely be cognizant of, but it’s not a foregone conclusion by any stretch. The great inflation of the 1970s occured 30 years after FDR’s record deficit spending. Over that time the government was very responsible about paying that debt off. Excessive inflation is not a necessary consequence of deficit spending and monetary expansion – it’s usually considered to be a consequences of “built in inflationary expectations” – a decade or more of high-ish inflation such that people expect higher and higher prices. It’s also caused by completely exogenous factors like the oil price shock. But there’s no indication that FDR’s massive debt (FAR bigger than Obama’s, as a percent of GDP) did anything to increase inflation in the long-term. In fact – in the 1950s (when you would have expected to see inflation pick up), we had deflation – the only time since the Great Depression that we’ve had deflation (until this year of course!).

    My point being that yes, if Bernanke keeps rates low for a really long time and we keep up these kinds of deficits we can expect inflation. But there’s no reason to expect that we definitely going to have it at this point.

    What we’re shooting for is some moderate inflation: 2-4% wouldn’t be crushing at all, and it would help to erode some of the debt that’s built up.

    I really enjoy the blog, Peter. I don’t mean to be harsh when I do decide to comment. But Ferguson has a very unusual take on these things and it has consequences, so I just wanted to sketch out the implications of the argument against Ferguson’s position.

  16. Daniel Avatar

    RBV –
    EXACTLY. The government is spending because investors and banks won’t. There are a lot of parallels to the Great Depression that aren’t obvious to the naked eye. Some people ask “well if the banks are really in trouble, where are the bank runs of the 1930s?” – The answer is that we are seeing the equivalent of bank runs, they’re just electronic now. Just take a look at the TED spread around November – an unprecedented spike. That was a bank run… but it was the banks and funds making runs on THEIR banks, not the Jimmy Stewart/clammoring customers bank run.

  17. Larry G Avatar
    Larry G

    this thread has been one of the more excellent ones in my view in that we have a number of different (new) commenters and the points they are making are exceptionally clear – have clarity in their meaning.

    One can disagree with them or what they are basing their views on.. but at the least

    ..we’re getting onto terrain where we at least are starting to agree on what the terrain itself looks like.. and then able focus on the “navigation” aspect of it.

    Prior to this conversation…I was not understanding the folks who are opposed to the current path other than they were uncomfortable with the basic idea of creating large deficits … but not really commenting on the strategy for the deficits – pro or con…

    What we are in the middle of, do I dare say, is a once in a generation (or more) circumstance that I doubt seriously anyone commenting in this blog was alive and at an age where they could understand the dynamics of the Great Depression.

    If you look up Mr. Bernanke though (http://en.wikipedia.org/wiki/Ben_Bernanke}

    you will see this:

    “Bernanke is particularly interested in the economic and political causes of the Great Depression, on which he has written extensively. Before Bernanke’s work the dominant monetarist theory of the Great Depression was Milton Friedman’s view that it had been largely caused by the Federal Reserve reducing the money supply. Bernanke focused less on the role of the federal reserve, and more on the role of private banks and financial institutions[19]. Bernanke found that the financial disruptions of 1930-33 reduced the efficiency of the credit allocation process; “

    so… Bernanke is in fundamental disagreement with folks like Groveton and other bloggers here – even if they themselves were not aware of that difference.

    So.. what have we learned?

    Well.. I would like to ask Groveton and the others who feel that the current path is wrong – if they think Bernanke is wrong… also..because it appears that the path the administration is taking is a path … that Bernanke …generally approves of.

    no?

  18. Larry G Avatar
    Larry G

    Actually..there is an even more important aspect to all of this and that is –

    what is the role of government in a situation like this…

    and.. a related question:

    do you believe that the Government should have stayed out of this and let the private sector right itself through unfettered market forces?

    no waffling on the answers guys.

    I’d like to hear from every one of you folks who are opposed to the current path that is being pursued..

  19. Gooze Views Avatar
    Gooze Views

    Daniel, LG, Dkuehn, et.al.

    OK, points taken on the liquidity trap but somehow this is exactly the fear that arose last fall when it really did seem to many that investment and finance were in free fall. I’m still scratching my head trying to figure out of Paulson got it brilliantly right or was bailing out Wall STreet cronies. But then, they all come from W Street don’t they — Paulson, Rubin, Geithner (the Fed anyway)?

    That said, and paying testimony to JMK’s liquidity trap, no one was lending at least last fall because they were too scared to do so. The government pumped billions (and now trillions) to unstick credit. It has been very unclear how well it has worked. Some data showed that by December, more money was being lent, but it was tiny. And, as we have seen especially with credit card holders, me included — excellent or good customers get zapped for things they didn’t have anything to do with. It is still unclear whether sufficient credit has been unleashed.
    There is still suspicions that big banks such as Bof A and Citi and Merrill got TARP money for bonuses. I know of one bank near Charlotte NC that did it right. It got $25 million in TARP money and worked a deal with local builders to offer zero-point financing at 3.5 percent for three years then 5 percent for new home buyers. Everyone wins– builders, buyers the bank. Finally some liquidity entered the system but that was because a bank president making less than $500K had the brains and compassion to get money where it was badly needed.
    As for inflation,you haven’t seen a spike because all the extra credit hasn’t hit the markets yet. You simply can’t pump up cash or credit that much and not have it make an impact. We’re talking trillions now. INdeed, the real long term hreat could be runaway inflation, not Japanese-style deflation or the Great Depression, the danger of which seems to have passed.

    Peter Galuszka

  20. Larry G Avatar
    Larry G

    don’t forget the two-part question:

    1. – Should the Fed have a role in this …i.e. manipulating monetary and fiscal “stuff”?

    2. – If you believe they should be.. is the current approach right or wrong – and why.

    Bonus Question:

    Which of the Pachyderms supports the current approach?

  21. Gooze Views Avatar
    Gooze Views

    Larry,
    That’s exactly what the Fed, or any central bank, does. It tweaks monetary flows to try and achieve some kind of policy goal.
    Ideally, the stategy of doing so should be free from political objectives, but this is never the case.
    Some believe that Alan Greenspan, who enjoyed immense popularlity from all camps, really screwed up by keeping inflation rates artifically low for much of the past two decades. This and federal regulators greatly increasing bank leverage levels, plus subprime, etc. did us in.

    Peter Galuszka

    Peter Galuszka

  22. Daniel Avatar

    Larry G –
    RE: “..we’re getting onto terrain where we at least are starting to agree on what the terrain itself looks like.. and then able focus on the “navigation” aspect of it.”

    Seems like that’s half the battle with these things sometimes, doesn’t it?

    I think Bernanke and Obama are definitely on the same page. My understanding is that Bernanke is the kind of guy that doesn’t see why Friedman and Keynes have to be at odds.

    RE: “do you believe that the Government should have stayed out of this and let the private sector right itself through unfettered market forces?”

    Under normal circumstances, I would say yes (perhaps with some moderate monetary expansion) – but when deflation is a serious risk AND a large degree of leveraging is involved, the market is going to get trapped in a vicious cycle. In that situation, the government should step in.

    RE: “Which of the Pachyderms supports the current approach?”

    Arlen Specter! Oh wait… never mind 🙂 Doug Holtz-Eakin, McCain’s campaign advisor for one. And Republican economists like Mankiw disagree on the details of the stimulus but agree that the combination of fiscal and monetary policy is necessary.

    Peter –
    Re: “As for inflation,you haven’t seen a spike because all the extra credit hasn’t hit the markets yet. You simply can’t pump up cash or credit that much and not have it make an impact. We’re talking trillions now.”

    It’s had lots of time – Bernanke has been lowering rates for almost two years now, and it’s been sitting at 0% for what – five months? Rule of thumb I believe is that monetary policy takes about six months to take effect. TARP money has been out there for months too. I think the point is that if we’re on the knife edge between inflation and deflation right now, we would be quite decisively deflationary at this point if Bernanke hadn’t done what he did. I DO believe in Friedman’s conclusion that pumping the money supply will cause inflation. Since I believe that, I have to conclude that what we’re seeing now is more inflation than we would have seen otherwise, and that’s a really good thing.

    And it will probably crawl up… and I don’t think we should be afraid of 3 or 4%. That will reduce debt burdens, which will help the economy pick up. None of us here want it to get too out of hand, but we’re better off now than we would have been without the expansion (which almost certainly has had an impact at this point) – and we could stand for a little more.

    Larry makes an interesting generational point about nobody living through the Great Depression. The flip side of that is that the biggest economic problem people have lived through is the inflation of the 1970s… which unfortunately means that people are terrified of inflation and don’t realize that it doesn’t have to be a horrible thing if it’s moderate.

    In a completely unrelated question – does Bacon’s Rebellion have any thoughts on the Democratic Primary for governor?

  23. Gooze Views Avatar
    Gooze Views

    Daniel,
    I’m not Bacon’s Rebellion, just a foot soldier. BR doesn’t endorse candidates. Personally, I’m not sure whom I am for on the Dem front. Just had lunch with the Big Bacon himself and th issue didn’t come up — we were discussing air conditioning and how to get juicy pictures of half naked women in Google.
    Peter Galuszka

  24. Larry G Avatar
    Larry G

    re: Dem Primary –

    Try this one:

    Groveton – a frequent commenter here has spun up a political blog at:

    http://grovetonsvirginia.wordpress.com/2009/05/10/va-gov-poll-mcd-beats-mca/

  25. “Should the Fed have a role in this …i.e. manipulating monetary and fiscal “stuff”?”

    That’s what the Fed does. However, the irony with this set-up is that you really don’t have a free market – quite the contrary.

    I always chuckle when I hear or read about people advocating “free markets”….until things go to hell and then they have no problem with crawling on their hands and knees into the Capitol asking for a bailout….it’s insane.

    My feeling is, “Hey, you wanted it, you got it.”

    As far as Greenspan goes….I agree with PG….he kept all sorts of “indicators” artificially low for too long causing one bubble after another. Greenspan saw the housing bubble coming…remember the comments about the market being “frothy”? Sadly, he didn’t have the courage or willpower to put in any stop-gaps.

    My biggest problem with the bank bailout is that the same people that bailed them out (taxpayers) are also their customers on a day to day basis….so were going to pay for it from both ends, i.e., as consumers we will pay more for their services in terms of interest rates and as taxpayers we will pay higher taxes to keep them in business.

  26. Larry G Avatar
    Larry G

    re: “My biggest problem with the bank bailout is..”

    what’s the alternative – right now …. in this place and time?

    I’m thinking the bank bailouts were best guesses … with no assurance that they would, in fact, work… but that path was the best of the worst options.

    no?

  27. Anonymous Avatar
    Anonymous

    People advocating free markett policies think that means a level playing field, but it doesn’t.

    Imagine a game of arm wrestling that uses a teeter totter. One side will always have an advantage in power and weight.

    Now imagine a round teeter totter with a single point fulcrum at the center of the disk. Now you have three players: two sides moving for some advantage, and the third player is government (allegedly) trying to equalize things. The more players you have the harder it is for one to gain advantage.

    You need government interference to help create a level playing field, but no one wants to play with a bully.

    Despite waht free market advocatyes claim, government can do some things better than private markets. The question is what things and how much needs to be done.

    —————————-

    The observation Dave made that not having deflation is the same as more inflation as otherwise is an interesting one.

    RH

  28. Anonymous Avatar
    Anonymous

    “,,so were going to pay for it from both ends, i.e., as consumers we will pay more for their services in terms of interest rates and as taxpayers we will pay higher taxes to keep them in business.”

    But the question is whether we would have paid MORE absent the bailout. We are paying for the continued existence of banks and all their services and profits which might have disapppeared forever because of a temporary pothole in the road.

    I don;t think you can consider what you are paying without considering what you get.

    RG

  29. Anonymous Avatar
    Anonymous

    Would you rather have your 401k own shares of Wells Fargo with the bailout or Washington Mutual without?

    RH

  30. Groveton Avatar
    Groveton

    I once knew a guy who was reading a newspaper article about the dangers of obesity when he looked up and saw a reflection of himself in the mirror. He realized that he was quite overweight. So, he stopped eating until (several months later) he died of starvation.

    What does this story illustrate?

    1. Newspapers are always wrong?
    2. Obesity is really not bad for your health?
    3. Bad things happen to those who look at themselves in the mirror?
    4. Over-reactions can have bad unintended consequences?

    The question wasn’t whether there was a liquidity trap – there was.

    The question wasn’t whether the government should have stepped in with a bailout – it should have stepped in.

    The question is whether the government’s reaction was so far over the top that it will end up doing more harm than good.

    In my opinion, the Bush and Obama administrations have over-reacted to the legitimate crisis and taken actions that will not only hinder recovery but will do more harm than good.

    I really, really wish that Bacons Rebellion provided and easy way to search comments (instead of posted articles). I would love to bring back a number of comments I posted about the economy and the meltdown from long ago. I believe the test of history would prove me more right than wrong (although I clearly remember fumbling a few predictions).

    One reason I started my own blog was to go on record with my throughts. As luck would have it my first posted article was “Deflation – Cheap Talk”. I published that article on Nov 26, 2008 (or … about 6 months ago). I stand by the predictions I made in that entry. The present policies will spark a significant inflation. I am no ready to further quantify that prediction. The annual inflation rate will peak at between 10 – 15% per year within three years.

    As an aside, my second article concerned Michael Vick and the possibility that he’s play in 2009 for the Redskins. Interestingly, those rumors are now picking up momentum.

    http://grovetonsvirginia.wordpress.com/2008/11/30/vicks-2009-season/

    I think everybody who opines on this blog should include some specific predictions in their commentary. Or, write their own blog with predictions. Otherwise, it’s hard to separate the ufeful from the blather.

    Mullah Groovy G. Groveton

    Btw – as for girlie pics – I am partial to this one:

    http://www.brambilasdraperyinc.com/images/celebs/donna-dixon.jpg

    Donna went to Groveton. Who knows, maybe my real name is Juan.

  31. Larry G Avatar
    Larry G

    re: “The question is whether the government’s reaction was so far over the top that it will end up doing more harm than good.

    In my opinion, the Bush and Obama administrations have over-reacted to the legitimate crisis and taken actions that will not only hinder recovery but will do more harm than good.”

    all due respect …and I do mean it…

    can you cite some economists that agree with you?

    The problem I’m having here is that many folks who hold your opinion …tend to cite political folks as their sources and while I understand and accept the “conservative” viewpoint on fiscal matters.. this seems to be one of those things.. that we say back during the depression when the fiscal conservatives… essentially refused to act with a strong enough response in a soon enough timeframe.

    All things being equal. (and perhaps they are not)… this is not a time for slavish loyalty to a dogma or philosophy..which is what some of the hand-wringers seem to be doing.

    They don’t know the way ahead…but they are very much concerned about the path we are on…

    so.. let’s take the Lee Iacocca test here.

    Are you leading…following….or do you need to get out of the way?

    If you are following.. tell us who you are following…

    If you are leading…then.. we have a small matter of credentials to discuss…

    If you getting run over… pay attention!

  32. Larry G Avatar
    Larry G

    re: your racy pix

    are you sure Groveton..that ..that is not some guy in drag?

    he’s got that look… you know?

    I gotta see more than the face…

  33. “But the question is whether we would have paid MORE absent the bailout. We are paying for the continued existence of banks and all their services and profits which might have disapppeared forever because of a temporary pothole in the road.”

    I see your point, but that remains to be seen.

    In the short term we probably did the right thing but in the long run we might just be propping up a business model that doesn’t work – I don’t see the point of propping up a business model that is fundamentally flawed. What type of market, free or otherwise would?

    Now that they have their bailout is it just going to be business as usual or will things fundamentally change?

    I mean, fool me once, shame on you. Fool me twice….

  34. Larry G Avatar
    Larry G

    I like the way the FDIC operates in terms of setting liquidity standards but staying out of the way of the health banks..but ready, willing and able to step in if it becomes a necessity.

    There has been talk of having a super-FDIC and having flexible liquidity standards according to the risk levels of the business model but the FDIC would stay out of it unless the business passed the “too big to fail” threshold and then the’d establish a framework similar to what they do with Banks right now.

    Here’s the deal in a nutshell.

    Do you believe in the CONCEPT of the Gov-created FDIC – it’s fundamental role?

    I think the average person would hollar pretty loud if we decided to repeal the rest of the Glass-Stegall Act.. the last part that still authorizes the FDIC.

    So.. if you believe in the concept of the FDIC… for banks… which are businesses… then why not other kinds of businesses?

    what criteria would you use to say it’s okay to have FDIC for banks but not for other kinds of businesses?

  35. Gooze Views Avatar
    Gooze Views

    Mullah Groovy G. Groveton,

    Checked out the Chick Pix. Not bad. But who is “Juan” Could it be “Don Juan” And Larry might be right. Is it really a man in drag?

    Peter Galuszka

  36. Larry G Avatar
    Larry G

    re: “man in drag”

    it’s much harder to make that mistake with Peter’s PIX.

  37. Anonymous Avatar
    Anonymous

    “The question is whether the government’s reaction was so far over the top that it will end up doing more harm than good.”

    That is always the question. We know how to look for the answers, we know what the criteria should be for good answers, but no one really wants to learn what the answers are.

    Obama is just as guilty of assuming an aswer without proof, or even retrospective analysis, as to whether it is the right answer.

    RH

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