Posted by: Dirk | November 23, 2009

Hocus pocus stimulus!

In what has been a major policy shift, US president Obama declared that the rise of US government debt should be contained to stop a possible double-dip recession.

This prompted Paul Krugman to comment:

What happened? To be sure, “centrists” in the Senate have hobbled efforts to rescue the economy. But the evidence suggests that in addition to facing political opposition, President Obama and his inner circle have been intimidated by scare stories from Wall Street.

The grip of Wall Street on political power is still tight. It is unclear to me how anybody could argue that the government failed or the financial system failed in and before the crisis when it is so hard to see where one thing ends and the other begins. Think of the bail-out of AIG, for example. Geithner and Summers are so connected to Wall Street that as an academic I find it hard to see their independence.

The Fed is supposed to be independent, but it will be hard to justify this. Inflation-targeting has failed, monetary policy is helpless, the balance sheet of the Fed is full of risky assets and deflation redistributes income from debtors to creditors. While the banking system was saved, jobs were not. And during this whole decade, the Fed failed to recognize the problems in the international picture, despite warnings from the BIS, the central bank’s best friend. And all this was not caused by an endogenous shock but by failing to recognize or actively creating bad policies and bad institutions. That is a horrible record.

There must be economists with a better track record (William White, Joe Stiglitz, Paul Krugman, …). President Obama should look for these people and consult with them. A discussion that also includes Geithner, Summers and Bernanke would perhaps be really helpful.

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