I’m obviously not a liberal, and a lot of the time I don’t fully subscribe the things that Paul Krugman talks about… However, the guy is flat out brilliant and you know, in this post I think he has a pretty darn good point. I’m going to copy in a few of the things that he talks about here, if you’d like to read the whole article (you should), go to http://www.nytimes.com/2008/11/14/opinion/14krugman.htmland check it out.
We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.
My thoughts: Well yes, you have a point there. We are in a really difficult spot. With a 1% fed funds rate, you really can’t do anything else on that front, and with money that cheap and things still going down the tubes, it’s a fairly backwards place to be. Furthermore, we are going to experience a very ugly negative feedback loop as we lose more jobs, and those job losses lead to more defaults, and more job losses, and less spending, and more job losses… well you get the point.
Krugman goes on to talk about normal economic policy responses and how they are ineffective because of the state of affairs in the world and makes a very compelling argument:
Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much than on the side of doing too little. The risk, if the stimulus plan turns out to be more than needed, is that the economy might overheat, leading to inflation — but the Federal Reserve can always head off that threat by raising interest rates. On the other hand, if the stimulus plan is too small there’s nothing the Fed can do to make up for the shortfall. So when depression economics prevails, prudence is folly.
You know, that actually makes sense. If we do something really, really drastic (Krugman suggests a $600B stimulus package) and it is too much, then we simply tighten things back up and get into a normal mode again.
Don’t get me wrong here, there a systemic issues that need to be mopped up in regards to credit and savings, but taking drastic action seems to actually make a bit of sense.
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