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December 02, 2008

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So here's the question (assuming I've understood your and others' analysis correctly)--is the TARP (or whatever it is) going to be able to unsnarl the issue of outstanding credit lines versus authorized credit lines? And if it can be unsnarled, how do Obama et al. convince the banks to take the money out of their mattresses and to start investing again?

Andrew, I've been sitting here hoping that smarter people than I are reading this and will respond. Sadly, it appears that they aren't (not unsurprisingly) reading this.

I wish I knew the answer. One answer to your latter question is that the federal government can ask the banks to invest in federal bonds, and use the resulting revenues to build neat stuff, or at the very least keep people in makework jobs until savers become less risk-averse.

That, of course, begs the question of whether the animal spirits of investors will recover before the government finds itself unable to finance the building of neat stuff via selling bonds to investors. Or at least unable to finance it without risking a debt explosion via rising interest rates.

Another possibility, I think, but haven't heard smarter people than me mention, is that the financial system winds up in the hands of the government (because it would go bankrupt without injections of public capital from TARP, not because socialists have seized control) and the new managers start lending.

A third possibility would be that Treasury leans on the Fed and they start monetizing more and more assets. (Me, I favor the monetization of used cars.) Poof, inflation, and poof money comes out from mattresses because otherwise it'd lose value even faster.

But truth, I'd be happy to have a better idea. I just had dinner with a bunch of economists and don't have a better idea. I then went to Brad Delong's blog and didn't leave with a better idea. Help? Please?

Isn't the government kind of putting its toe into the waters of option number 2 by getting into the commercial paper business? More generally, didn't Japan have similar issues with their real estate collapse? If that's the case, can we learn from what they did and didn't do so as not to have a decade-recession?

It's times like this that I wish that I'd had the calculus prerequisite to take some economics courses in undergrad.

Well, if you're the village idiot I'm the village dumb dog but here are two cents/woofs anyway.

The time factor makes things interesting. IMHO the situation moves from challenging in the short term to terrifying in the long term.

Short term (12/08 - 12/10) the problems are unemployment, a credit crunch, and fear - people running around calling this the Greater Depression. Basically, these problems can be handled by throwing money at them, and right now the world is willing to lend us the money to throw at good rates.

My preference would be big jobs programs, since according to some posts and comments on Econbrowser it will be years before we could break ground on the neat stuff even the bills authorizing them were coming up for a vote Monday. I am totally confused about the best way to help the credit crunch, but simple determination on the government's part to keep trying until something works should count for a lot.

In the middle term (1/11 - 12/13) people will probably stop throwing money at anything that has a government guarantee on it, but on the other hand by this time it will be possible to break ground on some neat stuff that would pay for itself in the long term. I'd prefer 90% public/10% private funding partnerships to avoid Bridges to Nowhere. If this is the beginning of a recovery this would also be a good time for government belt-trimming and for modest tax increases to kick in.

After this point it gets hard.

The scariest thing that I've heard about the American economy yet isn't the unemployment rate or the stock market crash but the comment (somewhere, some months back) that one thing which should make this recession quick and easy was that American companies were siting on piles of cash. The commenter didn't seem to realize that he was saying there was a major lack of investment opportunities. Anywhere.

This is where we need the big idea we don't yet have.

We are one or two big breakthroughs, several small breakthroughs, and lots of planning and engineering from being able to replace our carbon-based energy system with a more balanced one. The big decisions will be made in the next ten years. However, I don't think we will see results from them before Obama leaves office. (I would like to be wrong about this.)

Another game-changing thing would be the breakdown of Bretton Woods II and/or the rise of a new Consumer of Last Resort. The most likely path to this involves big changes in China's economic policies, and there's very little evidence of that happening either. I don't know what the US can do to change that as long as the Chinese like the status quo. The alternative is something like a miracle in Eastern Europe or maybe...?

Beyond that, the situation seems to call for more SHWI thinking about the future than conventional economics.

Best,

David Allen

Though of this after hitting POST - Dr. Maurer, how would the Fed monetize used cars? And, if your answer is what I think it is:

As an expert on Mexico, what would be the best way to spend lots of development money in Mexico without causing the long-term economic problems?

Is there any way for the Fed to monetize that?

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