"No Time to Dither"
There is no time to dither in a meltdown, by J. Bradford DeLong, Project Syndicate: Are the world's governments capable of keeping the world economy out of a deep and long depression? Three months ago, I would have said yes, without question. Now, I am not so certain.
The problem is not that governments are unsure about what to do. The standard checklist of what to do in a financial crisis ... has been gradually worked out over two centuries...
The problem comes when expansionary monetary policy ... and central-bank guarantees of orderly markets prove insufficient. Economists disagree about when ... governments should move beyond these first two items on the checklist.
Should governments try to increase monetary velocity by selling bonds, thereby boosting short-term interest rates? Should they employ unemployed workers directly, or indirectly, by bringing forward expenditures or expanding the scale of government programs? Should they explicitly guarantee large financial institutions' liabilities and/or classes of assets?
Should they buy up assets at what they believe is a discount from their long-run values, or buy up assets that private investors are unwilling to trade, even at a premium above their likely long-run values? Should governments recapitalize or nationalize banks? Should they keep printing money even after exhausting their ability to inject extra liquidity into the economy via conventional open-market operations, which is now the case in the United States and elsewhere?
Three months ago, I said that ... trying a combination of these items - even a confused and haphazard combination - was better than doing nothing. All five of the world's major economies implemented their own confused and haphazard combinations of monetary, fiscal, and banking stimulus policies during the Great Depression, and the sooner they did - the sooner each began its own New Deal - the better. ...
The conclusion that I draw from this is that we should try a combination of all checklist measures - quantitative monetary easing; bank guarantees, purchases, recapitalizations, and nationalizations; direct fiscal spending and debt issues - while ensuring that we can do so fast enough and on a large enough scale to do the job.
Yet I am told that the chances of getting more money in the US for an extra round of fiscal stimulus this year is zero, as is the chance of getting more money this year to intervene in the banking system on an even larger scale than America's Troubled Asset Relief Program (TARP).
There is an 80 percent chance that waiting until 2010 and seeing what policies look appropriate then would not be disastrous. But that means that there is a 20 percent chance that it would be.
"by the Victorian-era editor of The Economist, Walter Bagehot; and by the economists Irving Fisher, John Maynard Keynes, Milton Friedman, among many others.
The key problem in times like these is that investor demand for safe, secure, and liquid assets - and thus their value - is too high, while demand for assets that underpin and finance the economy's productive capital is too low. The obvious solution is for governments to create more cash to satisfy the demand for safe, secure, liquid assets."
"The conclusion that I draw from this is that we should try a combination of all checklist measures - quantitative monetary easing; bank guarantees, purchases, recapitalizations, and nationalizations; direct fiscal spending and debt issues - while ensuring that we can do so fast enough and on a large enough scale to do the job."
This is probably the best post about who to study and what to do that I've read since this crisis began. To the extent that we've actually been following this checklist in a series of lurches, we've managed to stay out of a Debt-Deflationary Spiral. However, we're not out of the woods yet.Posted by: