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New Deal 2.0

Posted by WARREN MOSLER on July 24th, 2009


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Excellent!

http://www.newdeal20.org/?p=3388

By Mario Seccareccia
Professor of Economics, Ottawa University
Editor, International Journal of Political Economy

July 23 —
Over the last couple of months, especially as there have been some signs of economic “green shoots,” there have also been growing pressures coming from conservative policy analysts that the Obama administration ought to be planning its “exit strategy,” that is, a plan that would eliminate the deficit over the medium term.

These pressures are based on fears that the large federal deficit, standing at 13.1 percent of GDP, together with the huge reserves that are sitting within the banking system as a result of the Fed’s monetary policy of quantitative easing, will soon metamorphosize into runaway inflation. Just recently, Fed Chairman Ben Bernanke added his voice to the chorus of those who are calling for an exit strategy.

Politically, all of this talk of exit strategy has served to weaken the Obama administration’s capacity to get important legislation passed. For instance, these fears of the deficit bogey have recently prompted the president to commit himself not to sign on to legislation that will add to federal deficits over the longer term.

Such stark commitments will only tie his hands politically and give credibility to a conservative policy view on the negative consequences of deficits that has been completely disproved by the facts. For instance, under the Bush administration, when unemployment rates were much lower than they are presently, we saw a rate of inflation that sat steadily at low levels, despite growing deficits. Moreover, Chairman Bernanke knows fully well that there is no positive relation between the volume of excess reserves in the banking system and credit expansion. The latter is driven by demand from creditworthy borrowers and not by the volume of excess reserves sitting in the banking system. Hence, the real fear should not be inflation but growing unemployment and wage deflation.

All of this talk of exit strategy has served to divert attention from the really important problem of rising unemployment whose official rate may well surpass the double digit threshold soon. Fortunately, there are some connected with the administration who are leery of this talk of exit strategy. For instance, in an article last month, Cristina Romer, chairwomen of the Council of Economic Advisers and scholar of the 1930s Great Depression, recounts how a similar debate over fears of inflation under the FDR administration led to both restrictive monetary and fiscal policies that engineered a second severe slump in 1937-1938 almost a decade after the 1929 crash. Romer cautions that such errors should not be repeated.

It is hoped that clearer heads will prevail in the current administration and that policy will remained focused on combating unemployment. What is needed is not an exit strategy but a full employment strategy. An exit strategy could abort a recovery and could mean that those green shoots will quickly dry up. As Paul Krugman so correctly pointed out in a recent op-ed: “government deficits … are the only thing that has saved us from a second Great Depression.”

Roosevelt Braintruster Mario Seccareccia is editor of the International Journal of Political Economy.


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One Response to “New Deal 2.0”

  1. Hoover Printing Presses Says:

    “Just recently, Fed Chairman Ben Bernanke added his voice to the chorus of those who are calling for an exit strategy.

    Politically, all of this talk of exit strategy has served to weaken the Obama administration’s capacity to get important legislation passed.”

    As I commented here earlier watching the Paygo discussions. All the congressmen, instead of trying to understand and listen to each others ideas and be constructive, were just politically posturing against each other while Rome burns. Today I think CNBC did a good job illuminating that bernanke, geithner, and even bair and others are all fighting for political influence and power through their respective agencies. With folks like summers putting pressure on other folks for political power too (say bernankes job), it should be apparent to all here actions are not being taken because people are ignorant. Rather while rome burns these various people are grandstanding and bickering with each other to hold onto whatever little piece of the pie they feel they are entitled too. Like 2 shopping machine princesses fighting over that last louis vitton handbag at macy’s. What children we have in our various government agencies – pathetic.

    Warren I want to sing some praise for you though, the last 2 articles you have posted show that some people realize that the correct steps are not being taken because of this political posturing for power. These people have too much power as it is and it has went to their head. Until we disperse all this power, and thereby deflating the ego’s of the people it enriches, nothing will ever change.

    “Moreover, Chairman Bernanke knows fully well that there is no positive relation between the volume of excess reserves in the banking system and credit expansion. The latter is driven by demand from creditworthy borrowers and not by the volume of excess reserves sitting in the banking system.”

    I knew many credit worthy, and NON credit worthy borrowers who were pushed into loans they did not need or want by loan officers and crooked salesmen wanting thier bonus so they could buy wifey and girlfriend some new louis vitton handbags. So the demand did not come from them, but from the loan officers themselves.

    As you said yourself Earlier Warren, that old grandma was pushed to buy that lawnmower by a crooked salesman, and you didn’t do a good enough job of restraining his negative karma on the situation, and niether did your boss that said to give her the loan too.

    Reply

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