Comments on: The year in review at Credit Writedowns – Stimulus http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Edward Harrison http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57838 Edward Harrison Wed, 23 Dec 2009 20:24:00 +0000 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57838 Here's my take: there is always a risk in having government 'intervene' in the economy. But, given the market failure last year, it was a risk worth taking. The alternative is collapse. And while collapse can lead to the relatively benign 1920-21 outcome most Libertarians point to in America, it can also lead to the much harsher experiences Germany and Italy suffered in the early 1920s. So if we were faced with the same post-Lehman choices again, I would advocate a strong and muscular government response again. I will actually write on this theme of crisis response later, but I had advocated a more free-market solution at the time. This was not the direction we went. As for stimulus, there again I would probably advocate the same, especially an increase in automatic stabilizers like unemployment insurance but I would of course have wanted the bankruptcy process to facilitate a liquidation of malinvestment in autos, in finance, in housing, etc. haris07, if you read my three December 08 posts you will see that we see eye-to-eye. I don't think fiscal stimulus is a "panacea." After all, the government can't make up for all the lost output of the public sector and more government spending is likely to increase malinvestment. there is only so much the government can or should be allowed to do. On this score, implicitly, I have far less faith in government than Marshall or Krugman. Here’s my take: there is always a risk in having government ‘intervene’ in the economy. But, given the market failure last year, it was a risk worth taking. The alternative is collapse. And while collapse can lead to the relatively benign 1920-21 outcome most Libertarians point to in America, it can also lead to the much harsher experiences Germany and Italy suffered in the early 1920s.

So if we were faced with the same post-Lehman choices again, I would advocate a strong and muscular government response again. I will actually write on this theme of crisis response later, but I had advocated a more free-market solution at the time. This was not the direction we went.

As for stimulus, there again I would probably advocate the same, especially an increase in automatic stabilizers like unemployment insurance but I would of course have wanted the bankruptcy process to facilitate a liquidation of malinvestment in autos, in finance, in housing, etc.

haris07, if you read my three December 08 posts you will see that we see eye-to-eye. I don’t think fiscal stimulus is a “panacea.” After all, the government can’t make up for all the lost output of the public sector and more government spending is likely to increase malinvestment. there is only so much the government can or should be allowed to do. On this score, implicitly, I have far less faith in government than Marshall or Krugman.

]]> By: Anonymous http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57837 Anonymous Wed, 23 Dec 2009 18:56:00 +0000 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57837 Edward, So you now suffer revulsion at big government. not happy that you are feeling this way but not surprised either. most anyone with any sense usually comes to this same sentiment. so does this mean you can go back to being an Austrian economist again! Sure hope so. Edward,

So you now suffer revulsion at big government. not happy that you are feeling this way but not surprised either. most anyone with any sense usually comes to this same sentiment. so does this mean you can go back to being an Austrian economist again! Sure hope so.

]]> By: haris07 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57835 haris07 Wed, 23 Dec 2009 15:14:00 +0000 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57835 As well intentioned as fiscal stimulus/deficit spending may be, why are you (and Marshall and Krugman) sooooo convinced that it comes w/o any problems? If public debt/GDP was small, then maybe a massive deficit is Ok, but where deficits are large to begin with, does government borrowing solve everything (even if done "properly" as advocated by you)? I don't know at what level of fiscal debt/GDP there begin problems (clearly Japan with an internally funded debt/GDP has been able to sustain this far longer than most figured possible but alas the US has a current a/c deficit and doesn't seem to have the luxury of going that route), but there would be problems at "some" level? I understand that in a fiat monetary system, governments never default on their debt, they can monetize their way out, but at "some" point, wouldn't this lead to severe inflation? I am not yet convinced that the deficit spending panacea that is being advocated by you and others will necessarily lead to lasting sustained growth. I think # 1 above needs to play out - the only real way out of a debt fueled, asset price inflation driven economy is to deleverage and start producing real goods and services. What can and should be done is to slow the process (instead of falling into a complete collapse), but I don't see any real way other than letting it play out. As well intentioned as fiscal stimulus/deficit spending may be, why are you (and Marshall and Krugman) sooooo convinced that it comes w/o any problems? If public debt/GDP was small, then maybe a massive deficit is Ok, but where deficits are large to begin with, does government borrowing solve everything (even if done “properly” as advocated by you)? I don’t know at what level of fiscal debt/GDP there begin problems (clearly Japan with an internally funded debt/GDP has been able to sustain this far longer than most figured possible but alas the US has a current a/c deficit and doesn’t seem to have the luxury of going that route), but there would be problems at “some” level? I understand that in a fiat monetary system, governments never default on their debt, they can monetize their way out, but at “some” point, wouldn’t this lead to severe inflation?

I am not yet convinced that the deficit spending panacea that is being advocated by you and others will necessarily lead to lasting sustained growth. I think # 1 above needs to play out – the only real way out of a debt fueled, asset price inflation driven economy is to deleverage and start producing real goods and services. What can and should be done is to slow the process (instead of falling into a complete collapse), but I don’t see any real way other than letting it play out.

]]> By: Matt Stiles http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57833 Matt Stiles Wed, 23 Dec 2009 01:50:00 +0000 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57833 Ed, I presume you will delve into this in the near future, but I'd like your take on some of the more desirable paths forward for a liquidation of these malinvestments that overhang our economies. Obviously, the goal is to do it as fast as possible so as to ensure prices hit bottom quickly and the investment process can begin from scratch. But some sense of social order must be preserved, lest despots seize the day. Ed,

I presume you will delve into this in the near future, but I’d like your take on some of the more desirable paths forward for a liquidation of these malinvestments that overhang our economies.

Obviously, the goal is to do it as fast as possible so as to ensure prices hit bottom quickly and the investment process can begin from scratch. But some sense of social order must be preserved, lest despots seize the day.

]]> By: Haigh http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-8554 Haigh Tue, 22 Dec 2009 20:20:00 +0000 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-8554 Edward, Are you not leaving out the untried aspect of fiscal policy, tax policy? Consider the large-scale influence of - mortgage/home equity deductions - taxes on capital gains - taxes on dividends - taxes on personal and corporate income It would seem to me a complete reversal of tax policy, no taxes on income, or capital gains, or dividends, and no mortgage deduction, and taxes based on consumption could be a very powerful alternative to government deficit spending and loose monetary policies. Particularly since the former would be widely disbursed throughout the economy, whereas the latter appears to largely funnel through the favored cronies. Edward,
Are you not leaving out the untried aspect of fiscal policy, tax policy? Consider the large-scale influence of

- mortgage/home equity deductions
- taxes on capital gains
- taxes on dividends
- taxes on personal and corporate income

It would seem to me a complete reversal of tax policy, no taxes on income, or capital gains, or dividends, and no mortgage deduction, and taxes based on consumption could be a very powerful alternative to government deficit spending and loose monetary policies. Particularly since the former would be widely disbursed throughout the economy, whereas the latter appears to largely funnel through the favored cronies.

]]> By: Brad http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57830 Brad Tue, 22 Dec 2009 17:19:00 +0000 http://www.creditwritedowns.com/2009/12/the-year-in-review-at-credit-writedowns-stimulus.html#comment-57830 EXCELLENT article! EXCELLENT article!

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