To choose austerity is to bet it all on the confidence fairy

[CHIMO]

The Keynesian policies in the aftermath of the Lehman brothers bankruptcy were a triumph of economic theory. In Europe, the US and Asia, the stimulus packages worked. Those countries that had the largest (relative to the size of their economy) and best-designed packages did best. China, for instance, maintained growth at a rate in excess of 8%, despite a massive decline in exports. In the US the stimulus was both too small and poorly designed – 40% of it went on household tax cuts, which were known not to provide much bang for the buck – and yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%.

The stimulus was always thought of as a stopgap measure until the private sector could recover. In some countries, such as the US, politics rather than economics drove the size and design, with the result that they were too small and less effective than they might have been. Still, they worked. Now, financial markets – the same shortsighted markets that created the crisis – are focusing on soaring deficits and debts.

We should be clear. Most of the increase is not due to the stimulus but to the downturns and the bank bailouts. Those in the financial market are egging on politicians to ask whether we can afford another stimulus. I argue that Britain, and the world, cannot afford not to have another stimulus. We cannot afford austerity. In a better world, we might rightfully debate the size of the public sector. Even now there should be a debate about how government spends its money. But today cutbacks in spending will weaken Britain, and even worsen its long-term fiscal position relative to well-designed government spending.

There is a shortage of aggregate demand – the demand for goods and services that generates jobs. Cutbacks in government spending will mean lower output and higher unemployment, unless something else fills the gap. Monetary policy won't. Short-term interest rates can't go any lower, and quantitative easing is not likely to substantially reduce the long-term interest rates government pays – and is even less likely to lead to substantial increases either in consumption or investment. If only one country does it, it might hope to gain an advantage through the weakening of its currency; but if anything the US is more likely to succeed in weakening its currency against sterling through its aggressive quantitative easing, worsening Britain's trade position.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/19/no-confidence-fairy-for-austerity-britain

[pnwmom]

1. K & R. n/t

[Warpy]

2. I keep telling people it doesn't matter if they think the poor are undeserving

because even the undeserving poor spend every single dime they get on goods and services, unlike the plutocrats who just hoard.

If they want a thriving consumer economy in this country, they're going to have to figure out how to scrape the money off the top and recirculate it at the bottom.

Remember, no amount of bailouts will allow a business to survive if it lacks customers for the goods and services it provides.

[DoctorK]

4. savings not hoarding

Savings are what create genuine credit for others to borrow (hopefully for investment, but even for consumption). This is how a market economy 'circulates' wealth.

You're right that bailouts don't generate genuine profits, which permit genuine savings, which allow for non-inflationary borrowing.

Printing money to encourage spending masks genuinely unprofitable activity, and can result in an overall reduction in the capital stock that under girds prosperity and living standards.

The bailouts are the wrong prescription, and only serve to forestall the economic reckoning and deepen the malinvestment that must eventually be addressed to resume real economic growth.

[Primitive Mind]

5. The TARP bailouts were necessary

The malinvestment pretty much clogged the system. The TARP bailouts were necessary to keep the money flowing like every single one of us needs. The stimulus created in the US was a folly. Investments that could have gone to improving internet and internet access and the construction of green energy production facilities went to things like resurfacing roads that really didn't need it.

[DoctorK]

6. the TARP bailouts were 'necessary'

to keep the failures (banks and other investors owning these 'toxic assets') with wealth ownership that the market was going to deny them for their malinvestment.

The policy of rewarding failure results in more failure.

The fallacy that printing money to loan to the banks to loan to the Federal government to generate taxpayer funded 'profits' on the interest spread is wreaking havoc on the real economy - witness the unemployment rate.

We need the Federal Reserve to get out of the money printing business (artificially propping the housing market with mortgage purchase and interest rate manipulations), but I'm afraid things will get much worse before people realize who the men behind the curtain really are. Hint: they're not wizards.

[Primitive Mind]

8. No, you don't reward failure

Most of the entities that wrote the bad mortages failed. Washington Mutual wrote a lot of those mortages. Washington Mutual no longer writes mortages or anything else for that matter, and that's just one example. The problem is that as these entities failed and no longer existed, others who had bought those assets could no longer call the buy back clauses when the investments went sour, and many of them failed as well. That created a wrecking ball that was hurting everybody worldwide, innocent and guilty alike and the ball was getting bigger with every pass. TARP, along with the other bank interventions done almost around the world, stopped that financial wrecking ball. The effects of not doing so were not going to be acceptable.

[DoctorK]

9. wrecking ball was redirected

at the American taxpayer instead.
Stupidity.
The 'innocent' were going to have the opportunity to buy these assets at cheap prices, instead the government jumped in and assigned those assets to the 'guilty' and handed the bill to the 'innocents'.

Deflation is a bogeyman to bankers and swindlers, not to workers and savers.

The bailouts were a swindle, and the failure to realize it ensures we'll suffer more of them in the future. This isn't the first time politicians have helped bankers over taxpayers, it won't be the last.

[Po_d Mainiac]

7. Hey Doc, this round is on me

:toast:

[OllieLotte]

3. I hope no one here believes this crap.

The best part was the line: "yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%."