Saturday, January 31, 2009

Olivier Blanchard on uncertainty & the financial crisis

Blanchard's solution: commit to expansionary policies now and, if necessary, in the future so that people will no longer believe that a financial apocalypse is around the next corner.  In addition, recycle the proceeds of government security sales into riskier assets and get the government to spend more on retail as well as encouraging the public to spend now (temporary subsidies and tax cuts?) rather than to 'wait and see'.
"And, within a year or less, we can be on the path to recovery".
That's hopeful and based on obvious policy optimism! The general policy prescription is the conventional wisdom but, in my view, there must be a certain amount of inevitable pain in deleveraging overextended economies.  My question is how far to go in promoting expansion through further debt funded government spending. Hopefully not so far that we are left with an impoverished public and private sector.  Partly this depends on Blanchard's assumption that things will be on the way to being hunky dory in a 'year or less'.

Apart from some inventory adjustment shenagins the US economy contracted by 5% in the December quarter. It will do worse than that in the March quarter.  Given close to zero interest rates the key policy options do reduce to public expenditure and tax cut measures.

3 comments:

jc said...

Blanchard's solution: commit to expansionary policies now and, if necessary, in the future so that people will no longer believe that a financial apocalypse is around the next corner.

Lol. He's basically bumbled his way into suggesting we need tax cuts.

The Intellectual Redneck said...

If this doesn't make you want to fly to Washington and slap your legislator, nothing ever will. Congress gives itself a $93,000 raise to stimulate the economy. It must be nice to have that kind of extra petty cash laying around. Instead of tightening your belt in this recession, wouldn't you like an extra $90,000? Never mind the record deficits. Never mind that ordinary Americans are struggling to pay their bills. Our Congress thinks it is far more important to be able to dole out perks to itself.

Gary Baumgarten said...

We'll be discussing the global financial crisis on News Talk Online on Paltalk.com at 5 PM New York time Monday February 2.

Please go to http://www.garybaumgarten.com to join in the conversation.

Thanks,

Gary