Martin Wolf Says Big Stimulus Programs by Big Debtor Countries Will End in Tears

[girl gone mad]

One thing I have found troubling is the near-unanimity in the US that we must Do Something about the burgeoning economic crisis, and that Something is big time monetary and fiscal stimulus.

Near unanimity is almost never a good thing in the political and policy realm, since conditions and options are sufficiently complicated so as to make it unlikely that there is a magic bullet.

Not to beat a dead horse, but we have been struck by the number of analogies made to the Great Depression that strike us as wrongheaded. The first is the idea that throwing money at "stimulus" will actually do the job, I see a lot of back of the envelope calculations of what % of GDP it will take to do the job.

But as the misguided tax rebates showed, it is quite possible to devise programs that are largely ineffective (roughly 80% of the rebates went to savings or debt reduction, which is a form of savings). A lot of money has similarly been thrown at the "get credit markets working again" program. And what are the results? Consumer and small business credit slashed, private securitizations a thing of the past, almost no debtor in possession financing (crucial for Chapter 11 bankruptcies), letters of credit scarce and costly, A2/P2 commercial paper at record spreads, and the Fed and Treasury still seeming to create, increase, or extend programs on virtually a weekly basis.

So what economist Tom Ferguson calls the "hydraulic Keynesian" approach might not be as successful as its advocates suggest. And that assumes it is the right remedy. We have argued that Keynes himself would not be on board with the idea of the US leading the stimulus charge:

http://www.nakedcapitalism.com/2008/12/martin-wolf-says-big-stimulus-programs.html