Stimulus: A history of folly | Hacker News Reader

Stimulus: A history of folly

commentarymagazine.com

21 pointsgaius11 comments

"Despite Franklin Roosevelt’s aggressive spending, unemployment reached 25 percent in 1933, fell only to 14 percent by 1937, and was back up to 19 percent in 1939.1 "

The level of ignorance in this article is astonishing. If the author knew economic history, he would know that Roosevelt's actions and the departure from the Gold Standard were responsible for the expansion of the money supply starting in 1933 and the massive reduction in the unemployment rate between 1933 and 1937. Roosevelt cut back on federal spending in 1937 against the advice of Keynes, making it ludicrous to claim the subsequent downturn was the result of aggressive Keynesian spending. It was the result of exactly the opposite.

He also conflates monetary and fiscal policy. He questions why fiscal expansion is expected to work when monetary stimulus has failed and TARP is not working. Disregarding the obvious reasons why banks aren't lending (they are insolvent black holes that are hoarding cash instead of lending), this shows a colossal ignorance of basic economics. It asserts that public spending cannot stimulate the economy because government spending will somehow crowd out private investment and push interest rates higher. But if interest rates rise then monetary authorities can lower them and increase the money supply. We would be very lucky to have this problem.

There are definitely long-term problems with current government policy. It is appalling to see to the public purse so eagerly take on such large amounts of private sector debt in starts and dribbles, especially when shareholders in institutions should have been the first players liquidated. I do not find Greenspan's argument that senior debt-holders need to be protected by the government to be very compelling. But these problems are overwhelmingly in the current efforts to salvage the banking system. The worst that can really be said for the fiscal stimulus plan is that it is probably too small, and about 10% of the funds spent will not do much stimulating at all, but were necessary to buy the bill through Congress so there would be ANY stimulus.

As the far right passes further into ignominious lunacy I am very glad the Internet is here to preserve this sort of dreck for posterity. May it come back to haunt them, each and every one.

You're taking FDR's heroism as a matter of faith--as you've no doubt been taught. "Economic history" is a history of booms and busts. The busts normally were short, whereas the Great Depression was extremely long--not really ending until after WWII (or, if you prefer, the beginning, though I'm tempted to discount military activities as anything 'economic'). I would suggest, in a basic way, that the policies associated with circumstances should take responsibility for those circumstances.

It asserts that public spending cannot stimulate the economy because government spending will somehow crowd out private investment and push interest rates higher.

Well, it is.

Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

http://www.berkshirehathaway.com/letters/2008ltr.pdf

If you think that can have a positive outcome, well...

You're confusing government spending with government lending.

Also, banks which are in no way, shape, or form in trouble have taken TARP funds because the cost of borrowing is so attractive.

I forget the name of the bank, but it's CEO was on CNBC, as an example of a healthy bank.

Why does the TARP allow this? Because the program is a mess.

But it's not crowding out private investment, and it's not even crowding out private lending, because it does allow healthy banks to borrow form TARP just the same.

> Also, banks which are in no way, shape, or form in trouble have taken TARP funds because the cost of borrowing is so attractive.

They were also told to take the money by the regulators. Apparently banks not being in trouble looks bad.

Then Congress said "you took our money, so you have to do biz our way".

Northern Trust is now trying to get out of TARP.

Well according to the Fed statistics (http://www.federalreserve.gov/releases/h8/data.htm), banks actually are still lending just as much as ever (more so to consumers and businesses). The only dip in lending was interbank lending between November and January (by about 10%, but has since returned to previous levels).

If you look at liabilities however, banks are hoarding cash. Currently they have about three times as much cash on hand as in September. Presumably this cash is coming from somewhere, and their hoarding of it is hurting something, but it's not hurting lending. My guess would be the cash is from the Fed, the Treasury, and share offerings, but IANAE.

So it's not as simple as 'getting banks to lend again' ... because they already are. The problem is more who they are lending to (being on the hook to GM for a revolving credit facility would make me hoard cash too, since the probability of getting repaid is not so great right now), and the fact that securitization has broken down to the point where most banks have to keep the loans on their books, which puts them at risk, especially when some many loans are randomly going bad. Everyone is scared of investing in banks for fear these bad loans might wipe the bank out or cause it to be nationalized.

And really, to bring this back to Roosevelt, a lot of what we have to fear is due to fear itself. When everyone is running for cover, trying to build up rainy day cash and laying off people just in case things get worse... well, things will get worse. I'm not saying the whole thing is caused by attitudes, but being scared to buy anything but treasuries certainly isn't helping stocks, and the DJIA is a hugely visible 'indicator' that colors many people's economic outlook in general.

Not so fast. The mystery of the great depression is why it was so long.

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonge...

The short version is that the spending didn't accomplish much but the "war on productivity" did - it kept the economy in the crapper.

That didn't end until FDR figured out that an arsenal of democracy had to actually produce stuff.

> Roosevelt cut back on federal spending in 1937 against the advice of Keynes

Did FDR actually consult Keynes? The relevant work was published in 1935-36.

As the far right passes further into ignominious lunacy

Dang dude, the hate was just dripping off that.

I like to see open and honest discussion. I haven't yet been convinced that FDR didn't prolong the Depression, but I'm open to persuasion. I'm certainly not going to build a shrine to the man, even if his actions were for the good and not ill. Presidents are just jerks like the rest of us. That's the way its supposed to work.

Comments like that make your logical arguments very suspect. I'd liked the rest of your post, even if I found fault with parts of your reasoning.

Coming from James "Dow 36000" Glassman, I think this article can safely be ignored.

The central fallacy here is "The stimulus money that flows to taxpayers, government agencies, and businesses has to come from somewhere (the unseen)."

The short explanation for why this is false is that the velocity of monetary circulation is a variable rather than a constant. A slightly longer explanation is here: http://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-a...

I like how he emphasizes that economists really don't know much about the economy and often change their minds. Nobody knows what effects the stimulus will have. Whatever happens will not be the effect of the stimulus alone, so the question of its success will most likely remain unanswered.

But this completely destroys his point that the stimulus is a mistake.

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