The Economy: "The Charge of the Stimulus Brigade"


The world’s economies are facing catastrophe; governments are frantically pouring trillions of dollars into the economy in an attempt to save what’s left of the fiat money capitalist system. But no one really knows what will happen, since there’s never been the threat of a $1.4 QUADRILLION derivatives market crash before. As a metaphor, I’d guess those involved in all this- governments, corporations, and individuals, are feeling somewhat like the brave Lancers in this video made in 1936, “The Charge of the Light Brigade.” Sadly, I think by the end of 2009 we’re ALL going to be feeling like this...

“The nation's hopes- even the world's- are riding on it, but Barack Obama's stimulus plan is no sure shot. Nobody can say if it will work. Some questions to ponder: What has to happen for us to say that the stimulus worked? Would it be a success if half the people who have lost their jobs secure some kind of employment? Would the benchmark be that one-quarter or one-third or half of the trillions in lost retirement savings were rescued? Would keeping in place two-thirds of those in danger of losing their homes be enough for us to say the stimulus has worked? Or should the standard be the Dow Jones Industrial Average clawing its way back to 10,000?

Except in the vaguest terms, no criterion has been laid down for what the stimulus is supposed to accomplish. Perhaps none can be. Economists who a couple of years ago disagreed about almost everything have come together to buy into the central part of the Obama stimulus approach that is putting lots of government money into anybody's hands who will spend it and get business rolling again. Overnight, after decades of being ignored and discarded, the ideas of John Maynard Keynes and Alvin Hansen, the two major economists of the 1930s New Deal era, make sense again.

In the seventy years since the Depression loosened its grip on America, economists and historians have argued over whether or not Keynes-Hansen deficit spending, or pump-priming, as it was called, succeeded. The jury is still out on that one, but the Keynes-Hansen approach has been dusted off and even the stiffest opponents of deficit spending have abandoned the closely held principles of their professional lifetimes. One such former opponent is Harvard's Martin Feldstein, chair of the Council of Economic Advisors in the Reagan administration and someone whose career has been spent in antipodean opposition to anything that smacked of Keynesianism. Things are so bad, in Feldstein's opinion, that he has put himself on record as saying there is no choice but to grab the buckets and pour water into the pump until America's distressed economy starts to chug again. The pump, however, may be seized up. We do not know if, when money is put into millions of people's hands, they will spend it. After all, the middle-class segment of the baby boomer generation has just seen its retirement savings all but wiped out. These people, with retirement coming up fast, may be of a mind to save every cent they can get their hands on.

In the 1930s, when a reluctant Franklin Roosevelt decided to try Keynes-Hansen deficit spending, the overall situation was different from the one we are trying to live through. The leaning towers of debt built up during the crazy 1920s had collapsed by 1934. Thousands of banks had gone under, taking the savings of countless people with them. Bankruptcy had carried away debt-ridden, weak companies and individuals. Farmers were thrown off their land when they could not make their mortgage payments; city and suburban families lost their homes.

The deficit spending of the 1930s began in a society that was, thanks to massive bankruptcies, an economic tabula rasa. It had been reduced to near ruins, but in the process debt was swept away. In 2009, quite the contrary is the case. Our current financial system is waterlogged with debt. Countless numbers of nonfinancial companies have the lead weight of indebtedness dragging them down, and personal debt is doing the same to the millions of individuals stuck with mortgages now worth more than their homes. No tabula rasa here, no debt-free new beginnings--and that raises a question: will the Obama plan be a stimulus to higher levels of economic activity or a life-support system maintaining an economically comatose patient?

We could go another way. We could sweep the table clean of debt by allowing massive bankruptcy to proceed for companies and individuals, a national liquidation. This was the plan advocated by Andrew Mellon, Herbert Hoover's treasury secretary. Something like that had worked in the recession of 1920. The pain was sharp but short. In a few months the recession was over, and the nation was off into the Jazz Age. In 1933 the pain was sharp but hardly short. Government action not unlike what the Bush administration has been doing may have stopped the process from completing itself.

Stepping back and allowing bankruptcies to roll could not be contemplated without creating a huge program to keep the millions who would lose their jobs in their homes, fed and clothed. The politics of the Mellon approach are too horrendous to bear thinking about, so economists of every stripe, starting as far right as Feldstein and as far as left Paul Krugman, have no choice but to fall back on Keynes-Hansen. Now let's see if it works.”

- Nicholas von Hoffman, http://www.alternet.org/democracy/118784/obama_can_pump_trillions_in_the_economy%2C_but_no_one_knows_if_it_will_work/

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