Writes Kevin Duffy:
10:43 am on October 27, 2008While the good doctor at NYU’s Stern School of Business has long predicted a worsening condition for the patient, he has misdiagnosed the cause of the disease. His prescriptions, as laid out in a recent Forbes Asia column titled, “The New New Deal,” are downright frightening:
Recently I suggested the need for a coordinated monetary policy rate cut. That cut arrived in early October, with the Fed, the European Central Bank and other central banks cutting their policy rates by 50 basis points (bps). The action is necessary, but only cosmetic, and it is too little, too late. European central banks should have cut rates many months ago, before the recession and financial crisis became so virulent. Now, 50 bps for the Eurozone is peanuts at a time when a minimum of 150 bps is necessary to restart the economy and unclog frozen financial markets; 50 bps is also too little in the U.S., given the damage to the real economy from the financial shocks of the last month.”
Given the collapse of private aggregate demand, consumption, residential investment and non-residential investment in structures are falling, and capital expenditure by the corporate sector was already falling before the latest financial shock and will now be plunging at an even faster rate. You need to give a boost to aggregate demand to ensure that an unavoidable two-year recession does not become a decadelong stagnation.
Since the private sector is not spending, and since the first fiscal stimulus plan (tax rebates for households and tax incentives to firms) failed miserably as households and firms are saving rather than spending and investing, it is necessary now to boost public consumption of goods and services via a massive spending program (a $300 billion fiscal stimulus).
The U.S. government should have a plan to immediately spend on infrastructure and new green technologies; also unemployment benefits should be sharply increased, together with targeted tax rebates only for lower income households at risk; and federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.). If the private sector does not or cannot spend, old-fashioned, traditional Keynesian spending by the government is necessary. It is true that the U.S. already has large and growing budget deficits; but $300 billion of public works is more effective and productive than spending $700 billion to buy toxic assets.
… Radical action can – and should – be taken to control the damage and prevent this meltdown from occurring.
No wonder Roubini is a rock star with the mainstream financial media: not only did he predict the collapse, he advocates massive government intervention as the only way out. Offer the MSM the Austrian remedy of complete withdrawal from the credit drug and you will be met with blank stares or looks of complete befuddlement.
