Fiscal "Stimulus" Doomed To Fail
Lost in the Congressional debate over how to provide stimulus is a more fundamental question...
Lost in the Congressional debate over how to provide stimulus is a more fundamental question: Does anyone remember how we got to where we're at?
The answer is Greenspan put the pedal to the metal by irresponsibly slashing interest rates to 1%. Banks thought this was free money and responded by borrowing short and lending long to finance all kinds of risky endeavors but typically centered around residential and commercial real estate.
Residential real estate has long since imploded. Now, a Glut Of Mall Space Headed Our Way will start an implosion in commercial.
Pointing The Finger At Greenspan
I have been pointing the finger at Greenspan for years. Fingers are now flying from many corners. Economist Anna Schwartz blames the Fed for the sub-prime crisis.
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
"There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says. According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.
She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.
The lesson of the 1930s is that swift action is needed once the credit system starts to implode: when banks hoard money, refusing to pass on funds. The Fed must tear up the rule-book. Yet it has been hesitant for three months, relying on lubricants - not shock therapy.
Anna has the right target, unfortunately she has the wrong cure: more of the same medicine that made us sick in the first place. The lesson of the 1930's has not been learned. The proper lesson is that there are eventually enormous consequences for unsound credit bubbles. The Fed has responded to every credit crisis with liquidity. Eventually liquidity fails. It fails when the problem becomes solvency, not liquidity.
Although Bernanke has reached a point of recognition about the problem, he has not come to the proper conclusion as to the solution. Tearing up the rule book is simply the wrong idea. That is the lesson from the Greenspan Fed.
Chairman Bernanke's Economic Outlook
Please consider Bernanke's Economic Outlook Testimony before the US House Budget Committee January 17, 2008:
To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving.
Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed. Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue.
Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult.
Another Step In The Right Direction For Bernanke
For Bernanke, this speech is another step in the right direction. Professor Depew was the first to congratulate previous steps by Bernanke to fess up to existing problems in Bernanke Hits One Out of the Park.
Ironically, everyone is shouting about the demise of the dollar over Bernanke's approval of stimulus instead of reading what he actually said. Bernanke wants the stimulus to be temporary, immediate in effect, and preclude an increase in the federal government's structural budget deficit.
That latter point is interesting. Bernanke is showing concern over the falling dollar and/or concern over future liabilities that can be met only by raising taxes. Bernanke is also showing concern over the downstream effects of stimulus that comes too late or lingers too long. Greenspan never worried about such concerns.
Piece by piece, those who look close enough can see Bernanke is distancing himself from his infamous speech, Deflation: Making Sure "It" Doesn't Happen Here. To reiterate my position: There will be No Helicopter Drop For Failed Banks.
Bernanke's Conditions Will Not Be Met
By asking for fiscal stimulus that is temporary, immediate in effect, and precludes an increase in the federal government's structural budget deficit, Bernanke may as well just say: "I am against fiscal stimulus".
Bloomberg is writing Bernanke Aims to Avoid Greenspan's Stimulus:
Federal Reserve Chairman Ben S. Bernanke may encourage lawmakers today to stimulate the economy while aiming to avoid his predecessor's "regret" of being tied to specific measures. Former Chairman Alan Greenspan "misjudged" the environment in which he endorsed tax cuts in 2001, and had "intense" regret the eventual legislation excluded his specific guidance, he wrote in his 2007 book.
Democratic lawmakers have suggested a package of about $100 billion that includes a rebate for middle-income taxpayers as well as expanded unemployment and food-stamp benefits. "I believe it can be done in 30 days," Hoyer told reporters in Washington yesterday. "Whether it will be done in 30 days is another question."
Enough of this Bernanke Lovefest
It's time to consider Bernanke: Juice the economy 'quickly'.
Bernanke, during the question and answer session, reiterated that he did not believe the economy would enter a recession, but he did say he expected the economy to grow at a "slow pace" this year and possibly into the beginning of 2009. But he added that the contraction in the housing market should finally begin to "wane" later this year.
Excuse me Mr. Bernanke, but if the economy is not headed into a recession then pray tell what's with the panic rate cuts and emergency stimulus proposals? Exactly what is wrong with the economy growing at a slow pace? Are you an inflation fighter or not? Don't you realize you are making it extremely difficult for anyone to believe you? Will the real Bernanke please stand up? Is there a real Bernanke?
Perhaps it takes much more time for a zebra to change its stripes, at least when talking to Congress.
America's Funniest Videos
Professor Zucchi was watching the congressional testimony and had that is to say:
Those watching Bernanke's testimony before Congress were just treated to a socialist diatribe by a congresswoman prepped to embarrass Bernanke as the "former CEO of Goldman Sachs (GS)." Of course the former CEO of GS she was referring to is Treasury Secretary Paulson, resulting in her utter embarrassment rather than Bernanke's. Not to be outdone, a Republican colleague just had to be educated on national television about the basic functioning of the Fed's Term Auction Facility (TAF).
I agree that knowing Bernanke and Paulson's resumes should not be expected of your average person. Nor is the TAF a household concept. But these lawmakers are on the House Budget Panel.
This is not some libertarian tantrum, Minyans. Congress is trying to figure out how to spend a few more hundreds of billions of your dollars "to help the economy", and they don't seem to have a clue of what planet they are on.
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