Paul Krugman Calls For Massive Stimulus Package NOW Or We Face Great Depression II.

Nobel prize economist and journalist Paul Krugman tell us today;

“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out. 

Here is the full article Fighting Off Depression

I am afraid the whole idea of writing everyone in the country a check of $2,000 (or giving them a tax break) isn' t going to stimulate anything.  I think it is very similar to Treasury's injection of TARP capital into the banking system.  Most banks are looking out to the not so distant future and seeing that between their commercial real estate book, their corporate loan book and their consumer loan book, they have A LOT more losses coming.  Therefore, Treasury gives Bank X $5 billion and Bank X says, "Thank you, that should get me through the writedowns we have to take in 2009."  Then Treasury and Congress wring their hands that they gave Bank X $5 billion and they didn't lend it. 

Now lets look at handing a "consumer" like me a $2,000 check.  I am going to say, "Thank you very much. Dear (Ms. Salzman), can you deposit this check in the bank and direct it toward this month's mortgage payment"?  I have all the crap I need.  In fact, if a guy who is "self employed", paying his own health insurance and tearing through his savings just to survive, took that check to "The Sharper Image" and bought a "Made in America" Massage Chair, he should be arrested!  I would argue that any consumer who spends his check on a new car or some other consumer item is just a continuation of the problem not the cure.  I also think if you give businesses tax breaks you can run into a similar problem.  The banks are pulling their lines due to any covenant breach, mainly based on free cashflow.  Are companies going to increase capital purchases even if they can accelerate depreciation when the main problem with their lenders is free cashflow?

If the government wants to stimulate the economy with some Keynesian spending program, I think it is going to be a big waste of money, defer the problem a few months, and just increase our exploding budget deficit and national debt.  I still think the main focus should be;

• Stuffing the banks with capital to allow them to start taking prudent risk,
• Spending money to alleviate the effects of unemployment (expanding unemployment insurance and doing something to aid workers losing their health care benefits.  Maybe assist workers who are in danger of losing their homes due to job loss too),
• Allowing housing to return to it's natural, pre "free credit" price levels (this $500 billion mortgage backed security program the Fed is embarking on will do nothing but lose us lots of money once rates begin to snap higher),
• Assisting citizens losing their homes due to foreclosure with a fat check to rent their house back for at least a year.

All that is going to cost at least $500 billion and it allows the financial system and the economy to begin to heal itself for real and take care of the nasty symptoms for the citizenry.  If we want to create real jobs, let the economy cure for real, not through artificial means that will just kick the can down the road a block or two.

Comments

[WTF?]

If $2,000 is good wouldn't more be even better? How about we just give every citizen a million dollars as a "stimulus" package?

Sorry, but you can't solve a debt problem with more debt and these packages are just loans against the future and decrease the current value of our dollar. The government interference has reached insane levels over the past year. They are just drawing out this collapse that had to happen, the problems we all face will be worse due to their involvement. The last 10+ years was a fake economy, we're going to see 10% unemployment either way (we're probably already there if you count the "discouraged" and "underemployed").

If this is like the last stimulus package, not everyone will receive checks. Those making over $100k with no kids are obligated to help pay for the checks over time, but will not receive them.

I don't mind paying more than my fair share, I just ask that the government manage my money prudently. I agree with you, these packages will not solve a single thing...people will simply save them or direct them towards essentials (like their mortgage/rent).