Obama’s economic plans

President-elect Barack Obama today announced more details of the economic team that will be advising the new president. I find these quite encouraging.

The Wall Street Journal reports:

Speaking at a news conference in Chicago, Mr. Obama unveiled the team that will lead his administration’s response to the slumping economy and battered financial markets, confirming that New York Federal Reserve President Tim Geithner will be nominated to replace Henry Paulson at the Treasury Department…. In addition to Mr. Geithner, Mr. Obama said former Treasury Secretary Larry Summers will head his National Economic Council, while economist Christina Romer will lead the Council of Economic Advisors and Melody Barnes will be director of the Domestic Policy Council.

I’m particularly reassured to hear that Larry Summers will head the National Economic Council. How much power this position involves will depend on how the internal White House politics play out, but potentially this appointment could set Summers up to be the single most important architect of economic policy for the new administration. Summers is blessed with a tremendous intellect, and he’s exactly the person who can sort through the current complex issues to identify and implement what needs to be done. The fact that Obama picked him for this position means that the president-elect is serious about this whole economy thing– Obama wanted (and got) the best person for the job, period.

I have also known and admired Berkeley Professor Christina Romer for many years, and consider her an excellent choice to lead the Council of Economic Advisors. I expect that Americans will come to find her clear speaking, keen insight, and common sense to be very valuable and reassuring as we face together the tumultuous months that surely lie ahead.

I’m also pleased by the appointments of Summers and Romer because of what they portend looking past the current crisis. I expect them to be voices of reason counseling against protectionist trade measures that could otherwise have the potential to cause tremendous damage to the U.S. and world economy. I would also expect these thoughtful economists to make sure that the administration understands the potentially disastrous economic consequences of relying on heavy new corporate tax loads as the way to pay for all of the initiatives.

Although I do not know Tim Geithner personally, I can see that his experience would be quite valuable in the current situation. We can’t have the new team learning on the job– they have to hit the ground running. Geithner fits that bill in a way that perhaps no one else in the world could.

I’d also like to comment briefly on the stimulus package that was also brought up in today’s news conference. I recall the advice that Larry Summers offered when we were debating this issue last January:

First, to be effective, fiscal stimulus must be timely…. Second, fiscal stimulus only works if it is spent so it must be targeted…. Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary– with no significant adverse impact on the deficit for more than a year or so after implementation.

Although our current situation is more serious than the one we faced a year ago, I still believe that this is a correct articulation of the core principles to keep in mind. Bigger government deficits should not be conceived by anyone as a long-run solution to our economic problems. When economists tell the politicians, “increasing the deficit right now would be a good thing,” we run the same risk as if a doctor advises an alcoholic, “a few glasses of wine will be good for your heart.”

But I think Obama’s announcements today may be just what the doctor ordered. Let us hope that the new president and congress listen carefully to the good doctors’ advice, and can later put the deficit drink down with the same enthusiasm that they currently lift it to their lips.



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48 thoughts on “Obama’s economic plans

  1. ndk

    Although our current situation is more serious than the one we faced a year ago, I still believe that this is a correct articulation of the core principles to keep in mind.
    I don’t. Fiscal stimulus and borrowing raise real interest rates. Higher real interest rates make deflation worse. We’re betting, in essence, that the Keynesian stimulus effects will be greater than the crowding out resulting from this additional borrowing. Japan’s results here are very mixed, and these authors suggest it doesn’t work well when government debt is too large. If you consider the unified Fed/Treasury bill, ours is not at all small.
    Do you know of a less empirical assessment of that question in the literature? I can’t find one.
    With rock-bottom private savings rates and a corporate sector desperate for cash at ridiculous yields, I’m not comfortable making these assumptions. I’m very worried that Summers, Geithner, et. al. are not sufficiently creative and will not challenge core beliefs in a time of crisis.

  2. rbert

    “…to be effective…fiscal stimulus must be timely…” that bids the question of is it too late, for a fiscal stimulus to be effective?

  3. sherry

    This past year the high cost of gas has strained our economy and damaged our society.OPEC just cut production and gas will continue cuts until they get prices back up where they need them. WE have spent billions on bail outs and stimulus checks. Our nation needs to invest in renewable energy and strive to become energy independent. Wind,solar and electric cars could replace a huge percentage of imported oil. We could produce cheap electricity and at the same time create millions of badly needed jobs. Renewable energy would be a win-win situation for our nation. Jeff Wilson just wrote a book called The Manhattan Project of 2009 Energy Independence NOW. I highly recommend this book for anyone concerned about our economy and our dependence on foreign oil. http://themanhattanprojcetof2009.com

  4. Gent

    K.I.S.S …
    Let the gov’t lead in the expansion of wind/solar/renewable energy devices by installing same on ALL gov’t institutions … Post Offices … Military … Schools … Highways … Anything & EVERYTHING run by the gov’t

  5. Gent

    Pres Elect Obama & advisors are thinking of creating jobs with Federal projects … ala what FDR did … Great!!!
    Dig a river or at least build a pipeline to take fresh water from the Great Lakes to the parched western USA

  6. Qingdao

    The major part of the first stimulus package was the $115 billion, temporary rebate payment… The argument in favor of these temporary rebate payments was that they would increase consumption, stimulate aggregate demand… What were the results? …[C]onsumption shows no noticeable increase at the time of the rebate [see chart]. Hence, by this simple measure, the rebate did little or nothing to stimulate consumption, overall aggregate demand, or the economy. (John Taylor in N.Y Times)

  7. D S Lamont

    Christina Romers appointment means that we will have at the Council of Economic Advisers an economist with a background in highly relevant economic history and with moderate Keynesian sympathies – just what we need. It is to be hoped that she underatands that one of the key lessons of Keynes is the importance of constructive US leadership in international economic cooperation – including in the international coordination of key economic policies, in building up effective international economic institutions, and in safeguarding free trade. She will be familiar with literature like Donald Moggridges biography of Keynes and Donald Markwells John Maynard Keynes and International Relations, which I think are very helpful in thinking and working our way – nationally and globally – through the present muddle.

  8. K T Cat

    Back on topic: What’s the end goal here? What does success look like? All I see from both parties is monstrously huge deficits, interest payments that dwarf everything else in the budget and a government that grows ever larger in one stimulus spasm after another.
    This is analogous to having a household credit card debt of $80,000 and running off to get a new credit card to take out a loan to pay the interest on the old one. That’s not a cycle you can keep repeating.
    Nowhere in any of this is the stated goal of paying down the debt. Without that as a specific goal to which you are committed, I can’t see that ever happening either in a family budget or the government’s.
    In the family example, that new credit card will make everyone feel better for a time, but the day of reckoning for the debt will just be that much worse when you run out of credit cards to take out.

  9. btenney

    Having built 2 stand alone solar systems, I can state from personal experience that Solar is way too expensive and too unreliable to contribute in any way to the National Power Grid.
    On many Winter days as much as 80% of North American solar capacity would be unavailable.
    Solar is practical only for very small loads far from existing distribution systems, or for boosting voltage at the extreme end of too long or undersized distribution lines.

  10. DickF

    Larry Summers said:
    First, to be effective, fiscal stimulus must be timely…. Second, fiscal stimulus only works if it is spent so it must be targeted…. Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary– with no significant adverse impact on the deficit for more than a year or so after implementation.
    Professor,
    Christina Romer is by far Obama’s best choice so far, but I doubt she will have much influence looking at the power and positions his other appointments.
    If the above is the best Summers has to offer we are in big trouble. Timely, targeted, and temporary – does this mean whether the actual policy is good or bad. This is inane; it has no economic meaning. This could be said about Thanksgiving Dinner and be just as intelligent. Summers has extreme Keynesian ideas that will push consumption when our whole problem has been caused by government pushing consumption. Summers is a bond man so a continuation of the stock market crash won’t mean much to him.
    Geithner is perhaps the most dangerous. He is virtually a clone of Paulsen so we can expect the same policies from Treasury that got us into this mess. Geithner is probably more articulate so he should make it easier for us to understand why markets are crashing. Geithner is also joined at the hip with Bernanke. Geithner’s shop has produced a paper giving guidelines to Bernanke how to continue to inject liquidity even after he takes interest rates to zero. In effect this will mean negative interest rates, the FED will actually pay banks to take their money.
    Also Obama spoke of “investment” or to translate from Keynesian speak to English, wellfare. Obama intends to put 2.6 million people to work on questionably productive government make-work. FDR proved that for each person put on a government make-work program one person was put on unemployment in the productive economy. The only way to pay a government make-work employee is to take enough from the productive economy to pay his wage plus the overhead to administrate the program, and good government administrators do not come cheap.
    If what I am hearing of Obama’s plans are actually put into effect I expect unemployment to be double digit by 4th qtr 2009. Obama ran on change but I have to say, as FDR copied Hoover’s economics, Obama seems to be in lock step with current Bush economics.

  11. K T Cat

    DickF,
    If you’re right, then the solution offered by Obama’s team is even worse. High unemployment leads to lower government revenues. We’ll stimulate ourselves right over a cliff as the interest payments on the debt will grow so large that we’ll never be able to catch up. The debt death spiral.
    They say that the military prepares the fight the last war. It seems that economists prepare to fight the previous crisis.

  12. ndk

    Michael Pettis has a great post on the accounting realities of this Keynesian voodoo. To quote him:
    But a trade deficit, by definition, is consumption supplied by foreign production, not domestic production, so insisting on a large trade deficit with China cannot be the way to boost US production.
    This is just another way of saying that the money that used to go towards financing private US consumption will now go to finance public US consumption
    Unless you believe that the government is a more effective allocator… well.
    Obama just spoke of the need to reallocate Federal funding toward more productive means. That’s a much more fruitful line of thought. Please, run with that one.

  13. jm

    Though all I know about Larry Summers’ policy ideas is what he wrote in an op-ed some months ago, his remarks seemed not brilliant, but rather thoroughly conventional — and brain-dead.
    He seems to me to suffer from the same sort of delusions about how the world works that plagued Greenspan. I suspect that he is one of those people who uses his brilliance to out-debate others in support of his pet ideas, rather than to rigorously question whether his ideas are in fact consonant with reality.
    The nearly universal failure of mainstream economists to foresee the current problems is a rather strong indication that there are serious deficiencies in their understanding of how the relevant systems work.
    A real scientist with a new theory will always try first to conceive and perform the experiment that most severely tests that theory — the experiment most likely to prove it wrong. From what I’ve read about Summers, I question whether he is that kind of person, and it seems to me that’s what’s most sorely needed now. Did Summers foresee or warn of what’s happened? If not, is he going to put his brilliance to work figuring out why he failed?

  14. LS

    Last week, Summers said that the new stimulus should be triple S, not triple T. In other words, it should be speedy, substantial and sustained.

  15. jed

    for whatever reason, it seems like those who recognized the financial problems were adverse to bush, now with obama in, he continues throwing money at the problem, yet those same people seem to be agreeable to it. we are in a disastrous state and the country is more than being bankrupted by the politicians in trying to stop a depression.

  16. DickF

    jed,
    I can assure you that I was appalled by the Bush administration as is most of America. He claims to be a supply sider then he proposes the greatest economic Fascist program in US history and it is like the blob, it just keeps growing and growning. But I am equally appalled at the Obama plan. It simply continues the Bush horrors.
    K T Ca, Yep, you pretty much nailed it. That is exactly what happened during the Hoover and FDR years and they tried and tried to increase federal revenues by raising taxes.

  17. Pitt

    K T Cat said:

    Wind and solar can’t replace a huge percentage of anything. The physics and chemistry of the situation just don’t work out.

    You are incorrect, and even a cursory glance shows that your link has a number of outright falsehoods. For example:

    “Charging batteries is extremely inefficient; electricity is used to create a chemical potential in the battery, but most of the electricity is converted to heat. And when the battery discharges again, a lot of the energy stored in it also heats the battery.” source

    Reality: “The coulometric charging efficiency of flooded lead acid batteries is typically 70%, meaning that you must put 142 amp hours into the battery for every 100 amp hours you get out.”

    The situation is even better for lithium-ion batteries: “The charge efficiency is 99.9% and the battery remains cool during charge.”

    (Note, however, that those percentages are not directly comparable, as the lead-acid is round-trip, vs. single-direction for LiI; round-trip for LiI is 95-99%.)

  18. Jason

    With the Treasury Secretary on his spending spree he surely isnt trying to get a good return on the tax payers investment. The bailout was to buy up bad mortgage debt but it never did. What is the purpose of the fund? Paulsons has warrants on many banks and they average 1 3 percent when enacted. Yet the cash investment is about 20 percent of the market cap. Maybe the next Treasury Secretary will be less erratic.
    http://nomedals.blogspot.com

  19. aaron

    Pitt, I didn’t look at what K T linked, but what you posted does nothing but support her point. 70% recovery from storage on top of transmission ineffiency plus production and infrastructure costs and maintenance and sustainablility cost aren’t cheap. Plus the Li ion battery factoid doesn’t include production cost (manufacturing Li batteries on the scale needed) or the discharge efficiency or maintenance and failure factors. Li batteries wear out and fail a lot.

  20. Hitchhiker

    You may be right about the appointments but, that still leaves the problem of those appointments being advisory in nature. Can anyone foresee a day when Pelosi or Reid are more concerned with economic realities than the perceptions of the masses and their likely voting behavior. I certainly can’t. So far, Obama has produced in his lifetime substantial rhetoric and little else. Is there a different man hiding inside the one that campaigned successfully for president? I hope so but, won’t bet the farm on it. I wouldn’t bet my lunch money come to think of it.
    Will the new decider listen more closely to his economic advisers or his political commissar? This question, I believe, drives much of the current uncertainty. He could put together the best economic team this country has ever seen but, if he doesn’t take their advice, if he doesn’t force the two ditherers in chief to take the advice, then what good is it?

  21. don

    Larry has a good grasp of economic fundamentals and sound judgement in applying them. TG is not an economist and I have to wonder about what he can contribute, although it does not necessarily take an economist to apply good economic policies – Volcker was not an economist, either.
    I’m just afraid that an unwillingness by the public to accept the proper path of adjustment will cause us more pain. Greenspan did us no long term service in his policies to maintain consumer borrowing after the dotcom bust.
    No mention in any of the above for what to do about the external imbalance or the role of forced saving via currency interventions. I can’t believe anyone has developed a good holistic plan if they continue to ignore these issues.

  22. halbhh

    There are a few pieces of now conventional wisdom (or almost of) with questionable presumptions underneath them. One seems especially ideological to me:
    1. The tax rebate stimulus of Summer 2008 had no effect. For instance, it may have bought time, delaying all the collapse for a while, and letting the Fed work more things out. Imagine much more rapid events — all that has happened recently happening in 2 months instead of 6. Also there is an amazing presumption that paying off credit card debt was somehow of no value…that seems irrational to me. Families with less debt spend a little more than they would with more debt, generally, month after month. If they cut spending, they cut it less, etc.
    Imagine debt deflation with *more* debt, and with *less* debt — which is less traumatic?
    Actually, this questionable idea that the rebate stimulus was wasted is the most amazing slight of hand type assertion I’ve seen in years.

  23. aaron

    It might have been beneficial if this happened before fuel prices spiked. Where did all that paper wealth end up and why isn’t it being used now?

  24. halbhh

    If the economy is faced with, as many indicators now suggest, a broad change in psychology where consumers want to pay off their credit debt, perhaps we should consider a way to jump forward in time to where much credit card debt is paid down, without as many job losses. How? A bigger tax rebate stimulus. Then being out of credit card debt will allow more consumers to resume just ordinary within-their-means spending.
    Perhaps not many realize yet that consumers may now go on strike until their credit card balances are more favorable.
    If we just wait to see this happen, I’ll have no pleasure at all in being correct. Rather, like yourself, I’ll be concerned, even if I saw it coming.

  25. ndk

    Also there is an amazing presumption that paying off credit card debt was somehow of no value…that seems irrational to me. Families with less debt spend a little more than they would with more debt, generally, month after month. If they cut spending, they cut it less, etc.
    halbhh, my debt is your money. If I repay my credit card debt, it’s a net contraction in the money supply. Our government debt is increased by this program, which is everyone’s debt.
    You could think of it as the government borrowing $100B, which takes current money out of circulation, and the private money supply contracting $80B as credit cards are repaid. Congratulations: you’ve just created more deflation.

  26. halbhh

    ndk — I agree with what you say. But a larger situation is that while the US can now currently borrow from the world long term (30 year) at 4%, for instance, individuals cannot of course. This would be beside the point except for this:
    In a deflationary spiral (Obama actually has used this term now, bringing it onto the popular radar), the problem is that consumers delay and reduce purchases more than needed to only be fiscally conservative, and this then begins the spiral of job losses and less demand, which begins a “depression”.
    Ideally, we want to see those with jobs spend prudently, instead of simply diverting most of their discretionary income entirely to savings/debt-paydown.

  27. James Harrigan

    Jim says “Although I do not know Tim Geithner personally”…
    Well, I do – in fact I worked for him, as an economist in the Research group, up until August 2008. I didn’t particularly like working for him which is why I left, but I have great respect for his brain. Not just his raw intelligence, but his willingness to learn, to listen to others who know more than he does, and to be open minded. He’s a great choice for Treasury, and my only reservation is, who is going to run the New York Fed now?

  28. halbhh

    ndk — that is, any “stimulus” is ineffective unless those with jobs do ordinary prudent spending.

  29. GK

    “Having built 2 stand alone solar systems..”
    Which is the second one? And why didn’t you put any life on Mars? Or give us two Moons, rather than one?

  30. GK

    Solar is not the solution for Europe, or the Northern half of the US.
    Solar is more of a lifeline to developing countries. Since most developing countries are at southern latitudes, AND have poor electricity infrastructures, Solar can help there. Thus, Solar will do much more for incremental power in India, Iraq, Egypt, VietNam, etc. than for replacing coal in the US.
    Solar could do well in CA/AZ/NV, though.

  31. aaron

    halbhh is right, I think it would be very beneficial to convert high interest and variable consumer debt to low fixed. That would actually be expansionary.
    I think a big problem is that people are maxed out on debt given their current prospects for future income. Add to that the uncrertainty of that debt. Banks respond by raising fees and rates. All that does increase risk.

  32. ndk

    halbhh is right, I think it would be very beneficial to convert high interest and variable consumer debt to low fixed. That would actually be expansionary.
    I’ll try saying this again. The Government here issuing 30 year bonds would be withdrawing current money from the system. The consumer using the money that the Government has received to pay back their short-term revolving debts removes current money from the system too. I really don’t think that’s expansionary money.
    It would be different if the Fed then monetized the 30 year bonds and took that risk onto its own balance sheet. It’s a lot of term risk for a Fed that already has a badly soiled balance sheet. However, that would be net expansionary. It’s also a little bit elaborate.
    You could instead just buy up the securitized consumer debt. This could help the banks more than it helps the consumers, depending on terms, and it might or might not make the Fed’s balance sheet worse, again depending on terms. We did this today. I don’t think it’s productive on net, because the Fed’s balance sheet is already so nasty. See Sims’ bad luck scenarios, inflationary in particular here. The Fed can’t really resell these bonds to drain money from the system. They’ve made themselves powerless to fight an inflationary spiral if we do suffer a reversal.

  33. aaron

    ndk, I’m pretty sure everyone understands that. The idea is increasing certainty, which the lack of is causing people to overvalue hard assets and… government bonds.

  34. K T Cat

    I still don’t understand the end goal here. It can’t be a steady state situation. If the debt has jumped by a trillion or so this year and will go up equivalent amounts next year, the consumer and businesses are tapped out, how can you do anything other than suffer recession or depression as spending contracts?
    These stimulus packages just make the situation worse once they wear off. It’s like taking more heroin because you’re going through withdrawls.

  35. ndk

    ndk, I’m pretty sure everyone understands that. The idea is increasing certainty, which the lack of is causing people to overvalue hard assets and… government bonds.
    aaron, I don’t think that should be a major policy goal, actually. It makes the economic system more rigid and less responsive to changes in information and data, which would normally cause important repricing to take place. We don’t want to sever the invisible hand and bury it somewhere on the Fed’s balance sheet.
    Even if this weren’t true, we would need to solve the other shortcomings, too.

  36. aaron

    Fair enough, but I think there is a big problem looming as bank try generate cashflow by increasing fees and rates on existing debt. They are basically renegotiating contracts (sure, people did agree they could change the terms at anytime), introducing undertainty, and increasing the risks they are facing. I’m interested in stopping what looks to be a dangerous and irrational feedback.

  37. TedK

    Professor,
    There is a lot of criticism in NYT articles and Editorials–that Geithner’s actions during the recent financial crises didn’t help and may have been counter productive; that he deserves to be ‘retired’ rather than ‘promoted’, and that Summers was part of the Clinton-era team promoting deregulation of trading in derivatives.
    I agree with the comments made by jm above: ” The nearly universal failure of mainstream economists to foresee the current problems is a rather strong indication that there are serious deficiencies in their understanding of how the relevant systems work.”
    DickF,
    Even conservative economists like Martin Feldstein agree that fiscal stimulus is the way to handle this crisis.

  38. ndk

    Even conservative economists like Martin Feldstein agree that fiscal stimulus is the way to handle this crisis.
    Two things, TedK:
    (1) I really think conservative and liberal are not the metrics we should be using in a crisis like this.
    (2) You’re right, and that fact really scares me. I don’t hear anyone willing to step out of line and question the rubric. The effectiveness of “stimulus” is taken as a fundamental law.
    Challenging long-held beliefs was traditionally academia’s job. I work in academia. I know damn well that stepping out from the party line is an excellent way to end a career. That’s a really deep, dangerous, entrenched problem.
    It’s why I’ve always liked Krugman, though his political bent drives me nuts. He has these occasional moments of cognitive dissonance, and that’s when I perk up and listen, because it’s often there that brilliance starts. It’s also why I’m so angry at most economists right now, who hyperventilate upon stepping out of their familiar frameworks and models.

  39. Jeff

    Like Professor Hamilton, I’ve met Larry Summers and came away impressed by his intellect. At a Cleveland Fed conference several years ago, Larry was on a panel rehashing the old “rules versus discretion” monetary policy debate. Larry was against rules, as he thought that whatever rule you used, sooner or later a situation would arise where blind application of the rule would be a bad idea. On the other hand, he recognized the time consistency problem: the inability of a completely unconstrained central bank to make credible commitments leads to bad outcomes.

    Larry’s solution to the conundrum was the best I’ve ever heard. He said you should not have rules, but you should appoint very conservative central bankers. He held up himself as the kind of person who should not run a central bank, and pointed to the then-president of the Cleveland Fed, Lee Hoskins, as the right sort.

  40. don

    Jeff
    Interesting story
    K T Cat
    I’m with you. There is the issue that total saving goes down in a recession, so some borrowing to stimulate may actually be beneficial, even if you see debt as the problem. But I doubt that spending (and borrowing) to maintain wealth (as in the bailouts) is effective at forestalling recession. And I doubt if stimulus will be worth the debt incurred if most of it goes to support foreign growth (i.e., if the stimulus is funded by borrowing from abroad).
    I really wish someone would address this last point. It seems to be universally ignored in the mantra for ‘free trade’ – nevermind that today’s trade regime is probably more accurately characterized as artificially expanded trade relative to the true free trade solution.

  41. David

    I’m certainly dismayed at Obama’s economic choices. Larry Summers was instrumental in dismantling the Glass-Stiegel Act that led to no oversight of banks; leading to mergers into megabanks that are too big to fail; deliberately keeping derivatives out of the reach of regulators; and allowing banks to carry leverage of 30 to 1.
    Geithner has been a key player in Citi, AIG, and Bear Sterns bailouts… all icebergs waiting for our ship of state.
    Robert Rubin has plenty of input just as he did in the Clinton administration when he steered preferential treatment for his company Goldman Sachs. Now he’s with Citi.
    Obama seems to not have noticed Sheila Bair of the FDIC. She’s the only one who has shown real insight and taken positive steps to stabilize the economy as compared to the faulty, shotgun approach of Paulson, Bernanke, and the rest of the crowd.

  42. Buzzcut

    I’m amazed at how Bob Rubin absolutely ruined his reputation with his involvement with Citi and the $108M in compensation he accepted from them over the last 10 years.
    He was an absolute god after the Clinton years and his brilliance steering the economy and developing the budget surpluses. Now, he’s just a borderline criminal.
    I can’t believe Obama is coming anywhere near the guy. Between Rubin and Hillary (and, by extension, Bill), the Limbaughs and the Hannitys have LOTS to talk about.
    The mainstream media is gushing about these choices, but I think they’re blunders, as is keeping on Gates. I don’t see how hardcore Obamaites aren’t totally disillusioned from the developments of the last few days.
    Okay, the economy is bad. Maybe a rethinking was in order. But Hillary as SOS? Keeping Gates? Summers? Rubin? A bunch of warmed over Clintonistas? That’s Change We Can Believe In?
    We’ve got a strange mix of Clinton/ Bush. That’s not change.

  43. halbhh

    ndk — You point out correctly that new federal debt of course absorbs money, so long as the Fed continues without “quantitative easing”, etc.
    But then, if job holders are already cutting sharply back on personal spending in fear, instead paying down credit cards and increasing their savings rate drastically, this affects the money supply also.
    Either way, the money supply is shrinking simply because people are saving more.
    But the difference is simply how much savings are consumers doing. A moderate amount, or far more?? If job holders are not purchasing much, then the whole economy spirals.
    Deflation must be fought at some point to avoid the feedback reinforcement (perhaps when yoy spending is down more than 5% ex gasoline for instance), and since this kind of deflation is driven by psychology, part of the solution must address the psychology, the fear of not having enough personal savings or of having too much personal debt.

  44. halbhh

    re just above: While it may be unconventional to consider helping consumers transfer private debt to public debt via a tax rebate, it may be one of the few ways to get out of a debt deflation spiral.

  45. K T Cat

    halbhh – I confess, you seem to have a much firmer grasp of the mechanics of money supply than I do. Thanks for the comment. It’s inspiring me to learn more.
    I would think that from a self-preservation viewpoint, the government wants to avoid deflation at all costs. Deflation enlarges debts in real terms and we’ve got enough of that to go around already.

  46. calmo

    So JDH passes his confidence in the Obama choices to his so demanding readers, –brilliant analysts of the highest caliber, permanent luminosities ready to redistribute the glad tidings to their relatively dimwitted cousins who are busy doin the housekeeping (toil on me boys).
    Except for Jeff at November 25, 2008 04:21 PM.
    And James at November 25, 2008 01:05 PM
    who scuttle what confidence I have in Summers and Geithner.
    From Buzzy,
    I’m amazed at how Bob Rubin absolutely ruined his reputation with his involvement with Citi and the $108M in compensation he accepted from them over the last 10 years.

    Chicken feed –compared to his lessers (just ask him) –including HF managers who WSJ famously reported made as much as $1.7B in 2006. But here, to get an idea of the rot, I like the Dick Grasso story, you?

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