The Stimulus Merry-Go-Round

I particularly liked this post from Clusterstock, not because it catches Krugman in “gotcha” moment but for the larger point it makes:

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance.To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.


So should one line about recovering from the ’01 slump discredit what he says about how to get over this one? Well, basically what his thinking here reveals is that he always wants to kick the can down the road. The way to get over the .com bubble is a housing bubble. And the way to get out of the housing bust is massive government stimulus. It’s a neverending stream of huge, economic endeavors with Krugman.

As long as this is the approach of government, there will never be a new normal that’s not either an artificial, sugar-high boom or a slump.

The last sentence is the most important. Joe Weisenthal hits the nail on the head when he points out the artificiality of our economy. The more we prop it up the more vulnerable it becomes until the point is reached when the capacity for stimulation is exhausted.

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