Bernanke Said What?

Since the housing market peaked and the financial crisis began, the government has spent:
$3.6 trillion (net after some repayments) on various stimulus programs,
$16.3 trillion in government guarantees to various financial institutions; plus
$7.2 trillion in federal government spending (the budget) trying to hold up the economy.

That’s a lot of money for a $14 trillion dollar economy. Yet the net result so far is an economy barely growing at 1.6 %, unemployment at 9.5% (or 17% depending on how you count unemployment,) a very troubled housing problem (inventories last month were at 12.5 months supply) and a financial system that can’t afford to lend (for fear of future defaults and/or the risk-free money they are getting because of Fed policy.) And this is only a few of our problems.

Now, last Thursday at the Jackson Hole Conference (isn’t that more expensive than Las Vegas,) we were told by Federal Reserve Chairman Bernanke that he has changed his mind and the economy may be showing down even more than he thought. Also, that the economy can not even handle the Fed keeping the interest and early payoff money the Fed is receiving from the bonds it purchased. That he is going to spend that money as fast has he receives it rather than shrink the Fed’s balance sheet. What a confidence builder. Plus, and this a big one, that the Fed is ready to print more money, in addition to what they have already done, to keep the economy going.

We have been debating how the Fed is gong to reduce its balance sheet. Now we learn that even the simplest reduction seems impossible. So get ready for Quantitative Easing, round 2.

As you know, critical thinkers have to look at all sides of the argument. Here is a summary of their analysis and proposals.

The Keynesians, economists like Paul Krugmanand and James Galbraith, want the government to significantly spend more money because we didn’t spend enough to begin with. They say the economy is not recovering at all. Federal Reserve policy has been “grossly inadequate”. The Fed should increase its balance sheet from $2 trillion to $4 or $6 trillion (would this cause a printing company bubble?) Most economists are Keynesians and they are putting a lot of pressure on Congress and the Federal Reserve to stimulate more and print more money. They, as always, are concerned only about the short-term.

The Keynesian-lite or Supply-side economists like Brian Wesbury or Larry Kudlow want additional tax cuts and more incentives for businesses to expand and hire employees. They say the economy is recovering, but very slowly. I am not sure they still believe in the V shaped recovery. They also claim that uncertainty, especially in tax policy, healthcare policy and undefined new financial regulations are some of the reasons the economy is not growing faster. They also believe tax cuts and incentives will result in more production which will keep inflation low. But, since a tax cut without an offsetting spending reduction is a stimulus, it would mean more borrowing, more quantitative easing. They too are only concerned about the short-term.


The Capitalists like Peter Schiff, Mark Faber and other Austrian economists want the government to get out of the way and let the economy heal itself. Sooner or later, we have to get to price equilibrium (in housing, wages, interest rates, etc.) They say the government has already spent far too much money. They believe that the free market, if left alone, will self-correct. That is how we get to the bottom. That is a recovery, getting rid of the excesses. All this government intervention is doing is delaying the recovery and laying a base for the next boom or bubble. The mal-investments caused by artificially low interest rates and the excessive expansion of money not only delays recovery but cause the next boom. For example, what is going to happen to wind power when the stimulus goes away? Or what’s going to happen to bond prices when inflation (caused by inflating the money supply) begins to rise rapidly?

We all see the economy through different lenses, but I am sure you will agree that most Americans think spending and then printing the money are out of control. Short-term and long-term. We may not be able to go from over indulgence to austerity in one step, but we sure need a plan and we sure need to get started.