Posted by WARREN MOSLER on January 27th, 2009
Just sent this as a response:
The problem with banking is the rising delinquency rate as the economy falters. Top down measures such as capital injections and asset purchases do not address this issue. Instead, bottom up fiscal measures are in order to restore income, output, and employment.
As Professor Shiller suggests, banks (as well as most of the rest of the private sector agents) are pro cyclical and not counter cyclical entities, and ‘forcing’ them to lend makes no sense. Only the Federal Government, which has no solvency issue, can safely act counter cyclically with proactive deficit spending.
A drop in ‘animal spirits’ is also known as an increase in ‘savings desires’ which reduces aggregate demand as private borrowing wanes.
Any drop in demand, however, can be readily addressed with some combination of lower Federal taxes or spending increases, and the longer ‘animal spirits’ remained subdued the longer our taxes can be kept down. This is well worth considering before we jump to the conclusion that we want to restore the financial sector and lending in general.
There is more than one way to skin this cat, and the option to sustain output and employment with lower taxes (and/or higher Federal spending) rather then with accelerating private sector debt has gotten no media attention whatsoever.
by Robert J. Shiller
Jan 27 (Wall Street Journal) —President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen….