GM and Chysler Bankruptcies

[Jester]

I like Lawrence H. White, for one.<blockquote>"Most economists, government officials and politicians continue to believe the standard Keynesian explanation for recessions: Recessions are caused by consumers and firms becoming "spooked" for no meaningful reason, so consumption and investment spending falls below normal levels. This reduces demand for goods and services, which reduces employment, which reduces spending even further, and so on. Since the level of spending before the "spooking" was presumed to be sustainable, the solution to the problem is simple: Increase spending to where it had been during the boom."</blockquote>... and Alan Reynolds, <blockquote>"Krugman insisted "for the 1.6 trillionth time, we are in a liquidity trap." That makes 1.6 trillion times he's been wrong about that."</blockquote>

Needless to say, I don't find the analyses particularily convincing. The White and Rose argument is just Austrian old hat: everything is somehow the fault of easy credit. If this was just, as they suggest, a problem of low interest rates finally meeting the inevitable uptick, causing a bear market, then the market would have adjusted by now. The problem here was the financial sector, and the reliance on: massive leverage; the assumption of perpetually rising house prices; and financial wizardry designed to eliminate risk, that instead only bundles it together. All three multiplied together was especially suicidal, as fragile assets were made to seem solid, and therefore could be heavily leveraged against. Low interest rates add to the whole witches' brew, but they aren't more than a fraction of the story. Even if they were, that tells us nothing about how to get out of *today*'s situation.

Alan Reynolds' use of the Japan case seems particularily strange. Japan went through a phase almost exactly like Krugman's analysis of the great depression: persistent deflation causing lingering economic stagnation. When they experienced growth, it was following an increase in government spending. Where their growth shut down again, it was following a premature attempt to balance the budget. He can fiddle with the numbers to try and poke holes, but I don't find it more convincing than the usual story.

Now, Krugman is in agreement with Romer, and most people who have studied the great depression from a monetary perspective, going back to the seminal Friedman and Schwartz: the right solution was monetary policy, and if they'd tried that sooner, things might have been a whole lot better. (This is, of course, the exact opposite of Hayek's advice.) The New Deal was nowhere near large enough to really do the heavy lifting of pulling up the economy. Getting off gold was the first great move, and reflating the currency, however slowly, was the second. The New Deal comes in third. It could have done better, but didn't, because FDR was skittish about continual deficits. In light of present events, Krugman is slowly moving towards the idea that monetary policy maybe isn't quite so awesome as he once thought it was, but I don't think he has any disagreement with the basic notion: if you have room to cut interest rates in a depression, do it.

But that only applies when interest rates can actually be adjusted. If nominal interest is near-zero, as it is now in the US, or was in Japan for most of the 1990s, there is no further work it can do. At that point, it's either use fiscal stimulus, or wait it out.

Eat dinner at my house. No, really, need is on the increase, and philanthropy is suffering a 5 to 10 percent decline in 2009. The next shoe to drop will be the failures of many States in the US to keep up with Social program obligations due to the vastly increasing number of people without incomes. If it is bad here, it is a catastrophe in the third world.

There are food riots at your house? During dinner, no less?

I didn't say things weren't getting worse, or that there aren't people in need. That's just a long way yet from food riots. Predicted events are not the same as actual events. (Not to mention that the Austrian solution to food riots is about the same as the Austrian solution to anything: stand back and let the market work its magic. Is that really where we want to go? Private philanthropy as the only thing between the needy and hunger, when that same philanthropy is currently dropping like a rock?)

Edit: As an experiment I just tried to Google about 20 states by entering %State Name% budget crisis. And, yup, I hit 20 for 20 with a 2008/2009 budget crisis.

Which makes me wonder why so many of them are trying to make some stink about rejecting stimulus money. But yes, quite a few states are in serious trouble, and will continue to be, unless the economy turns around.

-Jester