Moneyweek: Why we should be wary of Keynesian solutions

WTF?_2

From Moneyweek, more good stuff:

http://www.moneyweek.com/news-and-charts/economics/why-we-should-be-wary-of-keynesian-solutions-14609.aspx

Calling the situation a liquidity trap is a misnomer. America, and now the rest of the world, is in an insolvency (not liquidity) trap. Banks don't want to lend to bankrupt consumers and businesses any longer because for years there was too much liquidity, and they've already borrowed more than they can ever pay back.
The first sign of just how bad the situation really is was when Hank Paulson (known as 'Mr. Risk' at Goldman Sachs, and recently in charge of handing out $750 billion of goodies to banks and Wall Street) appeared on public TV about a month ago. During that broadcast he actually said, and I quote: "The economic problem is that consumers couldn't borrow to buy the necessities of life". Believe me, when you have to borrow to eat and pay the rent, you are already insolvent and on your way to bankruptcy; you just don't know it yet! Remember, it was Paulson and his Wall Street buddies at the major investment houses who got us into this mess by pushing lending on mortgages to unqualified people who could never afford them. When I heard Hank speak, it made me sick.

Worth remembering that the main exponents of 'borrow our way out of debt' are the same people who got us into this mess and apparently couldn't see it coming....

The obvious cure for the credit problem is higher incomes, less credit, and more savings, just as the only real cure for a heart problem is a healthier diet and regular exercise. Neither are fun, and it won't be easy to change the habits of our debt-addicted society. But our government will try to get the American people to go along politically with the easy way out through massive government spending, liquidity and borrowing.

Naaah - everyone knows the cure for bad health is to do more of the stuff that made your health so bad in the first place.....


It's always worth hearing alternative points of view to the myths that are being peddled as 'solutions' and apparently accepted by all and sundry at the moment.

setmefree2

It is hard to say how successful monetary and fiscal policy will be. But for me, I am glad that policymakers will be looking at them through a Keynesian lens. The alternative would be far worse imho.

BlondeHeadOn

".....when you have to borrow to eat and pay the rent, you are already insolvent and on your way to bankruptcy; you just don't know it yet!"

In a nutshell! This clarifies for me why I am so uncomfortable with the "spend your way out of debt" philosophy being followed by the Uk and US governments at the moment. It just seems to be setting us up for an even bigger fall a few months down the line.

But what do I know..?...?...

:confused:

Old_Slaphead

Thought Keynes advocated saving a bit in the good times and spending in the bad.

Labour Gov't seems to be spending shedloads in good and spending shedloads+ in bad



Quote BlondeHeadOn

In a nutshell! This clarifies for me why I am so uncomfortable with the "spend your way out of debt" philosophy being followed by the Uk and US governments at the moment. It just seems to be setting us up for an even bigger fall a few months down the line.
But what do I know..?...?...

Probably as much as Clown & Eyebrows

purch

Thought Keynes advocated saving a bit in the good times and spending in the bad

Thats true.

The solutions being offered at the moment only include the spending part.

Perhaps the headline should read "Why we should be wary of Semi-Keynesian solutions"

WestonDave

I can understand the rationale behind Keynesian approaches right now - letting people spend beyond their means created apparent wealth so restoring that practice would appear to be an obvious way of getting things going again.

The practical reality is however that lenders have been violently shaken out of their reckless and complacent lending practices. There is money to lend but only to those who are 110% credit worthy as opposed to 30% credit worthy 18 months ago. The real paradox however is that those that want to borrow probably aren't credit worthy precisely because their willingness to take on credit regularly has over extended them. Those that haven't over borrowed and are still credit worthy are unlikely to borrow enough to replace those who have been casual about borrowing in the past. In other words those that want credit can't have it and those that can have it don't want it. The only way therefore these measures can work is a return to irresponsible lending and with bank chairman currently sat facing a HoC committee that is rather unlikely!

WTF?_2

Old_Slaphead wrote: »

Thought Keynes advocated saving a bit in the good times and spending in the bad.

Labour Gov't seems to be spending shedloads in good and spending shedloads+ in bad

Yep - I was about to post that myself! Saving in the good and spending in the bad is a good idea. It's even in the bible with that parable about the seven cows or something....

However, getting yourself into debt in the good times to the point where you are almost broke before the bad times start and then getting yourself even further in the financial do-do as you try to spend your way out of that debt doesn't make a whole lot of sense at all and certainly doesn't match Keynes' intentions......

StevieJ

"The economic problem is that consumers couldn't borrow to buy the necessities of life". Believe me, when you have to borrow to eat and pay the rent, you are already insolvent and on your way to bankruptcy;

It is a good job we have the 'They receive 20k on the dole brigade' I cannot reconcile this with some of those other Mail headline threads Why do people have to borrow to buy necessities of life?

To the tune of the Dambusters, altogether - Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom Doom.

Sir_Humphrey

I love the way that free-market fundamentalists are so opposed to policies to save Capitalism.

The obvious cure for the credit problem is higher incomes, less credit, and more savings, just as the only real cure for a heart problem is a healthier diet and regular exercise.

If you could have those incompatible outcomes in tandem, it would be nice. I will shout this for the thickies at Moneyweek. IF YOU CUT CREDIT TO BUSINESSES YOU REDUCE INCOMES AND CUT SAVINGS RATES.

StevieJ

I will shout this for the thickies at Moneyweek.

Nice one :T

purch

IF YOU CUT CREDIT TO BUSINESSES YOU REDUCE INCOMES AND CUT SAVINGS RATES.

Careful you don't throw the Baby out with the Bathwater............or some such similar piece of whatgemecallit.