WHAT WOULD KEYNES DO? Kids, in times of financial crisis, we find ourselves turning to Bagehot and Keynes. In August of 2007 and again in March of this year, I posted on Walter Bagehot’s prescription that in a liquidity crisis, the central bank should act as the lender of last resort. Nick commented in March that I was saying that Chairman Bernanke was using an old idea and that it was the right move. Now, with a recession upon us and the prospect of a depression, Paul Krugman on Monday urged that we should have a large fiscal expansion, with large budget deficits. He gave two historical examples (one of them the United States in 1937) of situations (like the one we we are in today) “in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity” and the authorities tried to reduce deficits when they should have expanded them. A companion article by Krugman in the current New York Review of Books, entitled “What To Do?”, makes the same recommendation: “The answer, almost surely, is good old Keynesian fiscal stimulus.” Keynes wrote over 70 years ago. And so, Nick, I am saying that this is another old idea from a very wise man, and it is the right move. It’s good that Professor Krugman is arguing powerfully for the idea.

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