Saturday, January 30, 2010

Suspended in air?

Brad DeLong looks at the current fiscial situation and writes: (amp add)
There is about a 30% chance that the U.S. economy is about to start growing rapidly, with unemployment declining by a percentage point or two each year. There is about a 40% chance that we are about to start a recovery like or a little bit better than the "jobless recoveries" that have followed the last two (much shallower) recessions, with unemployment staying where it is or trending down slowly. And there is about a 30% chance that the unemployment rate is going to pause--and then start rising again in a double-dip recession.

The tools to fight a further rise in unemployment are threefold:
  • Banking policy--have the Treasury buy or guarantee risky financial assets in enormous amounts in order to boost asset prices and get businesses back into a position where they can profitably obtain financing for expansion.
  • Monetary policy--have the Federal Reserve goose asset prices by taking steps that lower real interest rates somewhere along the yield curve.
  • Fiscal policy--have the government spend money, either by hiring people directly or by buying things from private companies that then hire people directly.
Boosting/goosing asset prices. Are they undervalued or would this be an attempt to bring them back to prices of the borrow-bubble days?

BTW, DeLong says that of those 3 options, the first two aren't going to happen - although I wonldn't be so sure. But it's an interesting commentary on the state of the nation's economic virility when the way out is by raising asset prices. (POPULIST NOTE: We all know who that benefits.)


He left out the "nationalize the banks and write off the bad assets" option. Unsurprising.

By Anonymous Anonymous, at 1/30/2010 7:43 PM  

How about the old fashioned method of letting the bankruptcy courts methodically restructure salvagable insolvent companies and liquidate the basket cases?

Does this administration have any use whatsoever for the rule of law?

By Anonymous Anonymous, at 1/30/2010 7:44 PM  

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