"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Monday, September 6, 2010

Really good links - Too much debt - Ricardian stimulus - Too big to liquidate is too big to live - Who gets the money first?

Brad DeLong - Too much debt - "If our big problem were too much debt we would not be here, in depression. Too much debt generates inflation. The things that generate depression are shortages of financial assets, and excess demand for some class of financial assets then produces, by Walras's Law, excess supply of currently-produced goods and services. We had a "shortage of liquid cash money" recession in 1982; we had a "shortage of long-duration bonds" recession in 2002, and now we are having a "shortage of safe assets" recession."

Stephen Williamson - Credit market frictions and Ricardian stimulus - "Is there some case for a fiscal policy initiative that we could construct based on the particulars of the financial crisis? If we think that a key source of our recent problems is a temporary increase in credit market frictions, one approach might be a pure Ricardian one. When there are credit-constrained economic agents, a temporary tax cut for everyone, with a promise to pay off the resulting debt with higher future taxes, is effectively a large government credit program. It does not require any new government bureaucracy, and just works through the existing income tax mechanism. Those who are credit constrained spend the tax cut as if they were getting a loan, and work harder or consume less in the future so as to pay the higher future taxes, as if they were paying off the loan. Those who are not credit-constrained save the tax cut so as to pay their future taxes. There are no long-run implications for the government budget. Why didn't we just do that?"

John Kemp - Too big to liquidate is too big to live - "Poor use of language reflects muddled thinking and compounds mistakes. No phrase in the debate about financial reform is more wrong-headed and pernicious than the description of certain institutions as “too big to fail”. It should be expunged from the lexicon.
        No institution is too big to fail. But some institutions are too big to liquidate. Such institutions pose an existential threat to the stability of the financial system and cannot be allowed to live."

Scott Sumner - Who really deserves to get the new money first, so that they can spend it before prices adjust? - "The group that initially receives the new money is bond holders. But they are not lucky, as old money is just as useful as new money in stores. So if you don’t sell your bonds to the Fed, you can sell them to another person, and use that money to buy things. Thus those receiving the “new money” do not have any special advantages.
        The second misunderstanding is the idea of buying things before prices adjust. Those things where profits are easiest to earn (commodities, etc) see their prices adjust immediately, as the Fed announces the new policy. There are sticky prices that adjust slowly, but all 300 million Americans have an equal shot at those. They can use new money or old money to buy things. Those lacking money can sell assets to get old money, and then buy the sticky price goods."

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