I hate to say I told you so . . .

Since this past October I have been so alarmed about the worldwide collapse in demand that I have become something of a pest, badgering everyone who would listen about the urgent need for monetary stimulus.  At first the economics community seemed totally focused on the various bank bailout proposals.  The prevailing view was that the financial system was the fundamental problem and falling demand was a symptom.  I never understood this argument, as modern macro theory says falling AD is a symptom of monetary policy that isn’t expansive enough.  Now perhaps things are getting bad enough that people are beginning to understand that it does no good to bail water out of a boat if it is coming in even faster through a hole in the hull.

From a piece in Tuesday’s FT by Martin Wolf:

First, focus all attention on reversing the collapse in demand now, rather than on global architecture.

Second, employ overwhelming force.  The time for “shock and awe” in economic policymaking is now.

Third, make future normalization of fiscal and monetary policies credible.

Fourth, act in concert.  Even the US cannot solve its problems alone.

Fifth, avoid protectionism.

Sixth strengthen the ability of global institutions to help the weaker.

So how are we doing against these standards?  “Better than in the 1930s” is the best one say.

Good advice, but how are we doing better than the 1930s?  World demand is falling nearly as fast as in 1930.  In the 1930s the Brits saw the problem first, and devalued the pound.  The continental Europeans were the slowest to wake up.  Sound familiar?  Sometimes I wonder if policy attitudes are hardwired into different cultures.

BTW, I’ll have lots of negative things to say about Krugman (and already have) but he’s been “magnificently right” (to quote Keynes on FDR) about the nature and severity of the crisis.  He saw recession as the real risk when others were concerned about inflation.  Now if he’d only rethink his views on monetary policy and expectations traps. . .



2 Responses to “I hate to say I told you so . . .”

  1. Gravatar of TheMoneyIllusion » Why did monetary policy fail? TheMoneyIllusion » Why did monetary policy fail?
    23. February 2009 at 04:57

    […] “fix” the financial system in order to generate a recovery.  (One recent exception is Martin Wolf.)  Bank bailouts will not work, however, if nominal spending continues to decline.  Without a […]

  2. Gravatar of unghia decorata unghia decorata
    23. July 2011 at 13:30

    Really clean web site , appreciate it for this post.

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