Pater Familias

TRIED AND TRUE POLICIES. I do feel somewhat boastful that I was right when I said on March 18, 2008, some six months before the Lehman bankruptcy, that what the central bank had to do in a liquidity crisis was to “…to stand ready to purchase broad ranges of securities…” However, all I was doing was applying long established principles. I referred to the year 1873 to emphasize how far back “the accepted doctrine of central bank behavior during a domestic crisis of liquidity” went.

A surprising thing about the financial crisis was that things which had worked in the past were not tried. I am thinking of the reluctant use of Keynesian fiscal policy and the failure to use government “bad banks” to clean up bad mortgages.

LOOKING BACK AT THE QUESTION: “WHAT WOULD KEYNES DO”? The caption for my post on December 3, 2008 (less than three months after the Lehman bankruptcy) was “WHAT WOULD KEYNES DO”? The first sentence was: “Kids, in times of financial crisis, we find ourselves turning to Bagehot and Keynes.” At the end of the post, I agreed with Professor Krugman’s 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.”

I take some pride that ten years later a large fiscal stimulus has been accompanied by a dramatic increase in employment (or, using a related measurement, a dramatic reduction in the rate of unemployment).

Of course, I was agreeing with Professor Krugman just as I had agreed with Bagehot and Keynes.

A JUXTAPOSITION. I juxtaposed my post of March 8, 2019 in which I quoted Professor Krugman: ““The end result was that policy moved quickly and fairly effectively to rescue banks, then turned its back on mass unemployment.”and my post of March 7, 2019 in which I quoted Nick: ““The danger of the half measure, however, of bailing out the banks but then pivoting to austerity is you wind up with the banks themselves propped up at the expensive the majority of the populace.”

I enjoy arguing with Nick but it is also a pleasure when we find ourselves in agreement.

PROFESSOR KRUGMAN ON FISCAL POLICY DURING THE TEN YEARS AFTER THE LEHMAN BANKRUPTCY. On September 12, 2018, Paul Krugman reviewed the ten years after the Lehman bankruptcy in this column entitled “Botching the Great Recession”.

Krugman says that economic policies during that period were “botched”: “…unemployment stayed high for many years; we didn’t return to anything that felt remotely like full employment (leaving aside the question of whether we’re there even now) until late in Obama’s second term.”

The failure was in fiscal policy. “We needed fiscal expansion, some combination of spending and tax cuts.”

Krugman describes generally the villains of the failure to have a big enough fiscal stimulus–“some key Obama figures”, some “Very Serious People” and “Republicans”.

“…the Obama stimulus.. was too small and, even more important, faded out much too quickly.”

Krugman concludes that: “The end result was that policy moved quickly and fairly effectively to rescue banks, then turned its back on mass unemployment.”

AGAINST AUSTERITY (COMMENTS). In the last week Nick has commented twice about the economic policy of the last ten years.

On March 1, 2019, he wrote: “The danger of the half measure, however, of bailing out the banks but then pivoting to austerity is you wind up with the banks themselves propped up at the expensive the majority of the populace.”

I replied: “In the cases I can think of, austerity is never called for after the crisis (run on the bank) is over.”

Nick then commented on March 4, 2019: “I would argue that’s what has happened in the United States in the last ten years.”

I know that Nick is reading Mark Blyth’s AUSTERITY: The History of a Dangerous Idea, and I am going to read it also.