Dangerous Unintended Consequences: Banking White Paper
http://www.moneyandmarkets.com/files/documents/banking-white-paper.pdf
Case-Shiller March Report
http://globaleconomicanalysis.blogspot.com/2009/04/case-shiller-march-2009-analysis.html
Feds – Flow of Funds Report:
http://www.federalreserve.gov/releases/z1/current/z1.pdf
See page 112, Table; R.100 “Change in Net Worth of Households and Nonprofit Organizations”
See Lines 10, 11, 12, 13, & 14 – Total, Change in Net worth for Nation, see line 1
http://www.boston.com/business/ticker/2009/03/hancock_tower_s.html?p1=Well_MostPop_Emailed2

In arguing that monetary stimulus is more critical than fiscal stimulus, neither I nor others (including, I think, the authors of this blog) mean to imply that fiscal stimulus is unnecessary in the current situation (particularly as rates have hit the zero bound).

The issue is this:

This crisis is _no longer just a credit crisis_. It is a balance sheet crisis. The economy has been running on debt-financed consumer spending. That well has gone dry – consumers are tapped out, already suffering under massive debt, and the last refuge of debt-financing (home equity) is now not only gone, but actually negative. Those consumers who could get credit and go on a buying binge don’t want to do so (even though they secretly hope that everyone else goes on a buying binge so they can keep their jobs and build up their own savings).

Economists tell us that it will take 3+ years for consumers to dig out from this debt, but in the process what will keep the economy going (and keep those consumers employed)?

That is why I’ve been arguing that recapitalizing banks and “unfreezing credit” has been a red herring from the beginning. Perhaps necessary (that is debatable, since individuals with good credit have not had problems getting loans), but entirely insufficient.

The key is to restore spending power by lowering the debt burden, and for the US, this really means the debt burden on the middle class.

The only entity that has the power to do this is the government, and the government can do it in two ways:

Print money or Borrow money

Borrowing money will merely shift debt from private balance sheets to the public balance sheet.

Printing money is a tax on dollar-denominated wealth.

Borrowing money sucks capital out of the private sector into safe T-bills (bad). Borrowing money creates huge obligations for future generation (bad). Borrowing money from abroad keeps the dollar overvalued.

Printing money causes inflation (usually bad, but good when there is a risk of deflation and/or the goal is to devalue debt obligations). Printing money also devalues the currency (usually bad, unless your international debt obligations are denominated in your own currency and your trade balance is negative).

The thing about printing money is that you still need to get it into the hands of people willing to spend it – one very easy way to do this would be to cut taxes by 50% for a couple years and pay for it by printing money (easy, but not necessarily good). In effect, when the Treasury buys T-bills (QE) it is printing money to offset a tax increase.

Just because you can give money to someone who will spend it does not mean that you _should_. Contrary to simplistic economic models, it _really matters how the money gets spent_!!

Will it get spent on imported cars, or building an effective IT infrastructure for the medical industry?

An alternative is to print money and spend it on specific social objectives that have been long neglected.

The great challenge to this is political – it is coming from people who are more concerned about preserving their accumulated individual wealth than getting the world economy moving. These individuals will raise the following arguments:

1) They earned their fortunes by contributing great value to society . Thus, they desserve their money and it’s just fundamentally unfair to impose an inflation tax.

2) The inflation tax causes economic inefficiency…

News flash: So does the property tax, and the wage tax, and the sales tax?

Why is a big work-tax better than a small wealth tax?

I would like to see data showing that a 3% inflation tax causes more inefficiency than a 35% wage tax.

3) If you tax wealth through inflation, then this will decrease the incentive to save.

In the short term, this argument is hokey because right now we need more spending and less saving. In the long term it is a strong point – we can all hope the psychological lessons learned today will stick for a few decades.

4) Hyperinflation! Scary. Boooo! Hyperinflation!

Uh, no. Remember that point about our international debt being denominated in dollars? We aren’t living in Argentina.

5) Other countries won’t loan us money!

Good – our currency will devalue until US companies stop outsourcing US jobs.

6) Printing money is evil and Un-American. It will destroy the social fabric of the country and doom us all forever.

I would laugh, if it weren’t for the fact that so many people believe these arguments and they are so obnoxiously loud (particularly on talk radio) that they tend to intimidate others into silence.

I think the implications of your view, if I understand it correctly, reflect a much more serious problem than whether Bernanke is correct or mistaken. There are historical parallels which are extremely chilling.

1) A return to more/better govt. regulation (e.g. 50s and 60s)

2) Even greater dismantling of existing government influence over the economy (e.g. return to a gold standard, as existing in the Great Depression and earlier)

……

As to the Debt/GDP ratio, I have linked it multiple times.

I do factually question whether Greenspan (previously lauded as a hero by the free market) is the primary culprit. Many things happened at the same time. In modeling, we call this “collinearity” – meaning it’s impossible to empirically identify which was the primary causal factor (or if multiple factors were required). Was it repeal of Glass-Steagal? Was it the govt-debt fueled booms of the 80s (under reagan) and early 2000′s (under Bush II)? Was it the strong dollar which killed out trade balance? Or the decline in real median incomes, which forced an increase in debt to preserve consumption levels? Or something else?

As to whether a restoration of govt. control over the money supply is better than a dismantling of govt. control over the money supply, I submit to you this question:

Was the world economy more stable and peaceful between 1800 and 1944 (the age of gold and mercantilism), or 1945-2008?

And as to the link between the Gold Standard and the Great Depression, note:

http://www.econ.berkeley.edu/~cromer/great_depression.pdf

There is a nice, short discussion.

And finally, to your assertion that the secret to better government is less government (or in the words of Reagan, government is not the solution but the problem)…

“The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public’s dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.”

http://www.npr.org/templates/story/story.php?storyId=99590481

In the midst of that Bernanke took bold action which you may or may not agree was the right medicine, but the markets received very well and helped change the narrative.