Opinion: Animal spirits depend on trust

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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.

Warren Mosler

Animal Spirits Depend on Trust

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….


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21 Responses to Opinion: Animal spirits depend on trust

  1. Dave Begotka says:

    Chaos could still apply, the world population is going up and denial of blowback could cost us. Like if we do not obtain prosperity, our education system is slipping and we are on the verge of a “Great Depression”

    I believe that Warren is correct, and hope for the best but Africa and Asia are very unstable. BTW teen pregnancy is up in the US.


  2. RichW says:

    US is growing due to immigration. Birth rate is just enough to sustain population. Many European countries are already struggling with population decline. Japan is in serious trouble. No immigration, very low birth rate.

    No chaos theory, just fact.


  3. Dave Begotka says:

    Is this the Chaos theory? I would like to believe in it, however, looking from where I am standing we are along way from this!


  4. warren mosler says:

    Last I saw world population goes negative in a few decades. Seems with prosperity women don’t want as many children and have them later in life.


  5. Dave Begotka says:

    Mr. Chinese POO? Monkey? This monkey in Warrens world would be employed and insured, He is upset with the Chinese stuff because his Government sold him out for profit! Also in my view you are stereotyping.

    Warren? How does your plan stop the over breeding of the ignorant? Some people seem like they will have 10 kids just because they can. We need to see that the world is already showing signs that there are too many of us.


  6. chinese merde says:

    700B spent to keep bankers spending on $33K toilets that has legs?

    I saw a guy on youtube who says he doesn’t like chinese stuff while smoking some pot. He takes a “made in the USA” baseball bat to all those imports that you say are a benefit and smashes them good. If many americans are like him and want to smash thier “beneficial” imports, how can you win? You have utterly lost the war of ideas with the common people.

    I am sure he would like a job working as a park ranger growing weed in the forest to sell or give to your daughter to fry her brain cells. At what point will you concede Warren that too many monkeys like him and thier monkey wrenches have been thrown into the system? Our prisons are already bursting with drug users.

    Exactly how many human beings do your models/paradigms predict can be taken off idle and put to productive use doing something without one big mess? Certainly you are not advocating policies without hard numbers and calculations of humans to resources type ratios are you?

    Engineers built the titanic, a holy nut the ark. Sometimes more is not better. You talk about no stimulus without restraining aggregate demands in other areas – IE oil – fewer humans would solve that problem – did no one here watch logan’s run? Why is restricting welfare babies not a serious national political goal?


  7. Dave Begotka says:

    Not when everything comes from China, however your thinking may create jobs there.

    Could you guys make the math quiz answers under 10 so I can use my fingers easer!


    sada mosler Reply:

    Mosler Economics emphasizes the importance of understanding arithmetic. :)

    I will look into implementing a java calculator.


    Dave Begotka Reply:

    Now you sound like dose guys from dem dar Credit Card Companies.


  8. Dave Begotka says:

    I’ll “PIPE” in on this one! Either way the system is flawed, anything that comes out of Washington is plundered by politicians and there cronies before anything can get to the people who really need it. Look at the banker bail out, all it did was dissapear to the Banks, and they will not even say where it went!

    If they cut taxes now, most of the people who are in trouble are unemployed, so what is cutting their income taxes going to do? What if they give back some of what they paid in the past?

    Mike, listened to your show, too bad people have to threaten you for your view, its sad , some of the people who scream freedom and wave the flag the loudest will be the first to bash you head in for your opinion. Tried to comment on your page, it’s broke.

    I hate this math test on Warrens page, somtetimme it takes me a few trys.


    jcmccutcheon Reply:

    If they cut taxes now, most of the people who are in trouble are unemployed, so what is cutting their income taxes going to do? What if they give back some of what they paid in the past? You are not getting it. Reducing taxes increases demand which will create more jobs.


  9. zanon says:

    MIKE: Cato are deficit terrorists, they want lower deficits through much lower G and lower T. Not helpful right now — captured by ideology and have the average level of understanding of monetary economics (ie. zilch).

    Republican opposition to the newest Obama plan is also worthless. Tax cuts are all giveaways to business, and do nothing to actually improve the situation.

    Paul Krugman/NYTimes/Obama think people *saving* tax cuts are counterproductive, when in fact, that’s the entire point.


  10. jcmccutcheon says:

    It seems like the standard Republican talking points on 1930’s era policy is that the fiscal packages did not work (going as far as saying the policies made things worse) and it was only WWII that got us out of it. But wasn’t WWII spending itself akin to one big monster fiscal stimulus?


    RichW Reply:

    The argument against stimulus is almost surreal. They argue for stimulus when they say WWII ended the depression yet seem to believe they’re arguing against it.

    When I hear that argument, I just ask them what about WWII brought us out of the depression…


  11. vipul says:

    Have some patience and let’s see what happens.

    I’m one guy who voted Obama and I see no reason to beg for Bush back.

    Bush’s answer to everything for 6 years was tax cuts. And when the right answer was tax cuts, what did he do? Give us that totally useless 700 billion dollar bank bailout. Worse than useless, since now everyone thinks the government’s already spend 700 billion thus Obama’s 825 billion stimulus is the limit.

    If Bush or McCain had rejected the bailout and proposed a payroll tax holiday, they might have been worth keeping. But they didn’t, so I can’t see Obama doing worse than them.


    Matt Franko Reply:

    Ill stay out of the politics but…
    Thats what I have been thinking about the $700B, it was just approriated so that they could keep the accounting straight. But essentially a credit tranferred to banks so that capital requiremnts could be met to keep the regulators (who work for the same Treasury!) from closing the banks. No increase in agg demand, just avoid more layoffs. Although the 700B TARP is deficit spending, do you think it is typical/historically same as previous deficit spending as far as its counter cyclical effects?
    Agree could be “worse than worthless” as fiscal conservatives think the $700B was “spent” so they think we cant spend much more! I monitor Rush/Hannity and others and they are “on blast” vs the stimulus.
    Wildcards: Payroll tax holiday has GOP support, Obama admin signals next TARP 350B will be reprogrammed in large way, rate at which the 800B stimulus is encumbered, financial industry re-regulation…
    Its going to be an interesting few months…


    Vipul Reply:


    I probably stay out of politics too, considering how the Palestinian discussion sometime ago went.

    I think Warren also weighed in on this, that the TARP is essentially an asset exchange, so it won’t have any real effect on employment or aggregate demand. Though I guess some of the banks are using part of the money to pay salaries, or other things.

    It is true that the second half will supposedly be used to stem the foreclosure tide, so I guess that’s a positive sign.

    I don’t see any GOP people who are actually in power really supporting a payroll tax cut. Just look today, the House approved the stimulus which includes a $500 payroll tax rebate, and not a single Republican voted for it. Not one…

    Definitely going to be interesting


  12. Mike Norman says:

    Warren, please post:

    Cato Institute mounts full frontal attack against stimulus:

    “Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth. Below you’ll find some recent Cato work on “stimulus” packages.”

    Check it out at the link here.

    They are extremely well organized and funded. Plus, opposition by Republicans in Congress mounting. And, inexplicably, Obama feels like he has to form a bipartisan consensus on this, despite getting nearly 64 million votes, a mandate, Democratic control of Congress and zero need to appease Republicans.

    All we need now is another terror attack on U.S. soil and the folks who voted for Obama will be begging to have Bush back!


    warren mosler Reply:

    govt deficit spending in the 1930’s did more than most think because large numbers of workers in govt jobs were not counted as employed.

    But even so the problem was deficits weren’t large enough, as it took WWII deficits to double real output in two years with maybe 10% of the adult population in the military.

    CATO is pure propaganda in any case, as are most DC think tanks.


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