Fiscal Expansion That Is Deficit Neutral in the Long Run
links for 2009-11-19

Free Exchange Seems Somewhat... Snittish...

With respect to its: "That's the nature of many of these interventions—we all live to whine another day..."...

For the record, I wrote my piece not to "get a lot of links" but because I was trying to think through what the U.S. government could do over the next two years or so while the economy is flat on its back if it was hit by another big negative shock--as it is every 40 years or so. And I was coming up empty: credit easing does little; quantitative easing would require the resignation of the Fed governors and bank presidents; fiscal policy is out because of worries about the deficit; and banking policy is out because senators won't get out in front because everybody is making money off the TARP except for the government.

So what could we do? We might have to do something, after all, Odds 5%.

It (they?) writes:

Hindsight is occasionally blurry: BRAD DELONG got himself a lot of links yesterday by writing that efforts to save the banking industry last fall, by eroding public trust in government, increased the odds of a replay of the Great Depression from virtually nothing to 5%.... One side of this discussion is whether the government was actually able to handle things differently.... Economics of Contempt says no. I'm sympathetic to Mr Contempt's view, but I also think... the government could have come with something if it had wanted to. And I agree with Felix Salmon.... "[Y]es, given a bit more aggression and foresight, the Fed could have tried to cram down a haircut onto AIG’s counterparties. But at the time, no one was particularly interested in being harsh to the global financial sector; instead, they were trying to rescue it..."

Perhaps Mr DeLong is right, and America now faces a 5% probability of Depression. On the other hand, if you swapped out the folks who were in charge last fall with a group inclined to drive a hard bargain with the banks, you might find yourself in a world in which the Fed and the Treasury fail to convince markets that they'll do whatever they have to do save the financial system, in which a nasty cycle of deleveraging continues to drive important institutions into the ground, and in which the odds of Depression rise to 5%, or higher.

That's the nature of many of these interventions—we all live to whine another day...

Ummm... With respect to Felix, the key issue is not making AIG creditors take a haircut but rather making them share the upside with the government--as Chrysler shared the upside with the government with its loan guarantee program, as Al Gore was able to stand up there at the VP debate in 1996 and say that the U.S. had made money out of its bailout of Mexico.

If Free Exchange wants to ignore the fact that we are now out of macroeconomic running room, they are of course free to do so. But it might be more constructive for Free Exchange to help me think how we can get some of that running room back. We might need it. We might need it real bad.