Tuesday, Feb 09, 2010
Keynesian solution or the creation of more debt?
Independent: Forget cuts and keep spending, Brown told
''One of the world's leading economists has urged Gordon Brown to reject "fiscal fetishism", defy the markets and maintain, or even extend, the fiscal stimulus of the British economy. Joseph Stiglitz, who won the Nobel Prize for Economics in 2001 and has served as chief economic adviser to President Clinton and chief economist at the World Bank, warned that the financial markets were like a "crazy man" that could not be appeased with cuts to public spending.''
Posted by hpwatcher @ 06:27 AM (743 views) Add Comment
14 Comments
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1. bystander said...
...so his answer is to continue to feed the 'crazy man' already high on cheap, and by all accounts getting cheaper, money, so he becomes ever more crazy and even more convinced of his own self importance. Brilliant. As has been said before QE will never stop and soon this will be a world of bankers passing non existent money around through the ethernet, enriching each other and shafting each other in equal measure. Why, oh why would any graduate of engineering, science etc. actually go into their chosen field of expertise, when they see the huksters and shysters of Wall Street, the City etc. being given free reign to over leverage, and therefore make money, go bust, get bailed out and binge on easy taxpayer, supplied credit, and make money. There simply is no stimulus to go into properly, socially important vocations when the carrot for failure in the world of easy finance and backstabbing is so large and so gold.
2. dbc reed said...
This guy has a point.Why should we dance to the tune of the American ratings agencies when they passed as AAA mortgage derivatives that as soon as the banks bought them started to disintegrate in their hands ?Ever been right royally shafted? The Guv should think about getting up class actions against these canting hypocrites who have wrecked capitalism .
3. paul said...
I actually agree that spending is the only way out at this stage unfortunately.
As for the ratings agencies, well they have self-serving interests - if each country had its own ratings agency, every country in the world would have triple A ratings.
So is it any mystery that Western economies have good ratings and new money economies have lower ratings? The answer is not half as important as who is asking the question.
4. techieman said...
As posted below see:
"Japan's Keynesian Flop"
http://www.j-bradford-delong.net/economists/keynes_wsj.html
Or
Japan's Disastrous Keynesian Experiment
http://www.aei.org/outlook/7119
If you dont give people the confidence to spend the money to consume that you have used to try to inflate / reflate the economy then the money isnt going to be effective. The clue will be the savings ratio and/or how much tax is applied at the personal level.
5. vacuouspolitician said...
"Mr Cameron has argued that comparatively small, but immediate reductions in public spending and the budget deficit, perhaps as small as £1bn out of a total deficit of around £175bn, could persuade the markets that an incoming Conservative government was getting the public finances under control."
Sums him up to perfection. Yet another vacuous politician to follow on from the ultimate vacuous politician. Pathetic.
6. watching with amusement said...
I have to agree with this article. It is reiterating a point, but why are the markets paying so much attention to the ratings agencies when they messed it up in the first place?
@1 bystander. I certainly agree with your point about the money not going to the bankers, but this money is to go into the rest of the economy in terms of Health, Education, Roads etc. It's not about the money going to bankers.
Keynsian policies are based on the idea that someone needs to be spending something in order to get the economy going again, and in situation such as this the only person really able to do this with any confidence is the government. Whilst inefficiencies in the public sector may stick somewhat in my throat, it is better for there to be people in these types of jobs with money to then spend in the private sector (or, Government appointing private contractors) than nothing at all. Reining in the spending will just ensure that no-one has any money.
7. Goldbug9999 said...
"I actually agree that spending is the only way out at this stage unfortunately."
I don't. Collapse the credit market and allow the chips to fall where they may. The only long term way out is to allow the current system to die a natural death and for sustainable systems to emerge. We need a new generation of home owners who can buy at rock bottom prices and hence have sustainable non-credit disposable income, a new generation of not-so-credit-dependent businesses.
We need MASSIVE public spending cuts to the point where taxes can actually be LOWERED i.e. remove all current and future index linked public sector pensions and replace with private schemes, halving of housing benefit to force down rents, introduction of a stamp system for essentials as in the US, immediate scaling down of our military to only that required for home defense, immediate cessation of all foreign aid, immediate cessation of the asylum system.
Yes it will be painful, millions of people will have to live in squalid crowded conditions for years but that what we (collectively) get for living beyond or means for so long.
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9. letsgetreadytotumble said...
Why listen to these so called top economists. They did nothing to warn of the impending doom, and some of them probably didn't see it coming. I'm getting the impression that a lot of economists are nothing but charlatans.
Amuses me how Keynes get mentioned to support the idea of spending you way out. He actually wrote a complete book, mostly dealing with an economic philosophy based on prudence and preparation for a downturn. He even admitted in later life that his ideas may not work.
What is happening is not based on Keynes. All we have had is living off credit that has now collapsed. Now, what system is that, Brownsian?
10. techieman said...
watching with amusement - eventually you are right, but as i tried to illustrate it didnt work in Japan, and there is no value for money in doing it here.
Its a question of where does the spending go and how effective is it. The marginal propensity to consume has probably fallen off a cliff, whereas the marginal propensity to save, has probably gone up considerably . Add to that a contraction in incomes and the fear of further contraction and job losses, then i cannot see how this money can be effective.
Its a bit looking putting the taps on in the bath when the plug is pulled out. Better to wait for the plug to be put in when there is very little water left, and then filling it up.
So we have spent £200bn and what exactly do we have to show for it?
11. techieman said...
http://www.rttnews.com/ArticleView.aspx?Id=1194784&SMap=1
"RTTNews) - Total savings of Britons rose GBP 38 per head through 2009 to around GBP 2,205, the ING Direct survey showed Friday. But savings fell GBP 149 in the first half of 2009, reflecting the damage done by the recession via rising unemployment and slowing wage growth.
The official household savings ratio jumped from a low of negative 0.7% of disposable income at the beginning of 2008 to 8.6%. The increase reflected a combination of cutbacks in borrowing and an end to the large-scale off-loading of equities.
Mark Cliffe, group chief economist at ING Direct said there is no sign of a convincing increase in saving in bank accounts or other financial assets. "Indeed, if we are right in expecting income growth to slow sharply in 2010, savings are likely to fall afresh."
With slowing incomes and recovery in asset prices fragile, ability to purchase financial assets will be curtailed. Further increase in savings ratio is unlikely and it would possibly head back towards zero over the coming two years, the ING said. "
I would take the forecast and the reasoning with a pinch of salt, although savings could fall because people might dip into their savings if they are laid off etc, its the MPS that is the issue. In other words for each extra £1 earned how much of that is likely to be saved. I would say probably most of it which means that the multiplier wont kick in and support a general economic reflation, any more than we have had already.
Thats why my general view is bearish.
12. rumble said...
Keynes.... kicking at a dead horse.
13. watching with amusement said...
@8. techieman - apologies, but I didn't read your two links before I posted and have just perused them now. I will have to look at them a bit more thoroughly and give them some thought. They certainly require and deserve some deep consideration.
They do support the opinion (one in which I have a certain amount of favour although it may appear contrary to the public spending view) of the need for a quick, sharp and maybe incredibly deep crash to clear everything out and then everyone can get back to efficient businesses producing appropriately priced goods and services.
(I am struggling to resolve the public spending v. quick clear out conundrum...)
14. nickb said...
I think Stiglitz is essentially right, but it depends how the government spending is financed. In Japan it didn't work because they were financing expenditure by bond issues. This attracted investor money that would otherwise have been lent elsewhere in the economy with no increase in credit creation. Read about e.g. "chartalism" on Wikipedia... Stiglitz is certainly right if he's cautioning that the finance cretins have an interest in engineering and then exploiting a crisis, with their agenda of deregulation, privatization and public spending cuts. Even as they march off with humongous bonuses themselves. Why is no-one proposing to put this gang of crooks against a wall...