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
