The government "bailout" is based on the economic theory of one man, John Maynard Keynes. Keynes was not a normal man. Not abnormal like Stephen Hawking is abnormal, more abnormal like Richard Simmons is abnormal. While very odd he was still very smart understood economics, I just disagree with a lot of his theories. Keynes did a lot of study on economies during recessions and depressions, which is one of the reasons he is so looked to at this time. He said that during a recession an economy is unable to pull itself up and the only way for it to get back on its feet is help from the government. The idea is that the spending stimulates the economy and money starts to flow to others by way of jobs, which leads to pay checks which leads to spending and thus reversing the downward cycle of the recession.
There are two problems with our current situation that I can't understand how this theory would work. First is just a general problem with the theory. Keynes was right that spending by the government can reverse a recession and depression. What I haven't been able to find in his theories or have heard an explanation from the Obama administration or anyone in Congress who has voted for the bill is what will happen when the recession is over? How will this be repaid? How will we deal with the debt? There will come a time when countries will call their debts due and other countries will not be willing to loan us more. The credit card offers will stop coming. Then what? That exact scenario caused huge problems for Bolivia and Poland. Both those countries suffered from hyper inflation and depression when they couldn't borrow anymore and had too much debt and couldn't pay it off. The U.S. is heading down the same road.
The second problem causing this recession that isn't touched by any economic theory I have been able to find is the lack of trust. Nobody trusts anyone else to do the right thing. People aren't trusting banks to give them honest contracts that are just. They are worried of interest rates jumping up or the banks trying to swindle them out of their money. In return banks don't trust people to pay back their loans. Too many people of fraudulently obtained mortgages borrowed more than they should have and are willing to walk away from their home without giving any thought to the contract and promise they made to pay money on their debt. No amount of government spending is going to restore trust. That is something you just can't stimulate.
Tuesday, February 17, 2009
Keynesian Shmeynsian
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2 comments:
I think we could finance the bailout by asking all of the countries in europe that are still in debt to the US from WWII to pay up! Britain finally paid off the last of their debt in 2006: http://en.wikinews.org/wiki/Britain_makes_final_World_War_II_debt_payments
Neither Germany nor France has paid up. It would of course be impossible to pay off the benefits received under the Marshall plan, but I think that was part of the cost of winning the Cold War. Anyway, this has very little to do with your well-written and well -reasoned post Jon, just something I was thinking about....
I just read a very interesting book about countries debt and how it relates to their poverty in many cases. It is called "The End of Poverty: Economic Possibilities for Our Time" by Jeffrey Sachs. A great book with some great points. He talks in there about the Marshall Plan and the good that is has been for the Western world. I agree with him, if it wasn't for the Marshall Plan I think that we would be paying more to deal with the problems that would have resulted in those areas of Europe. Extensive poverty, corruption that would have resulted, and the possibility of terrorism especially in the countries bordering the Middle East. So I think that our benefit has been equal in many ways to those countries that were helped by the Marshall Plan. I wish the UN, IMF, WHO would follow more closely the example of the Marshall Plan and let the countries help them selves with the money rather than telling them how they should spend the money. They aren't working. This has been a long comment, should have just done another post.
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