Send in the Helicopters
I SAY AGAIN, Global Public Square with Fareed Zakaria is a brilliant show. If you’re not watching it every Sunday you are missing out on a great education. I’m skipping over the part about Afghanistan and Pakistan this week and going right to the part with Martin Wolf and then the interview with Stephen Harper, the Prime Minister of Canada.
First, Martin Wolf is the chief economic commentator at London’s Financial Times. There are important subtleties present here. Try to note them. The Financial Times is over a hundred years old. They are pro-business and conservative.
”WOLF: Well, first of all, I think we have to recognize this is a very serious problem we're now in. We are in a major, massive global downturn with a real prospect of getting out of hand.
Everything is going very badly. The shrinkage of world output is terrifying. And I think this is an event which can only now be compared with the '30s.
Everything has turned out worse than anybody expected, even the most pessimistic people a year ago.“
If you think that reads bad, you ought to listen to how bad it sounds.
Notice that this guy -- from the business newspaper in London -- is agreeing with Krugman.
”WOLF: Well, the problem with the stimulus package, in my view, is essentially twofold. First, surprisingly, it's too small. I know $900 billion -- or $800 billion -- sounds like a lot of money. But this is a $14 trillion economy “
”WOLF: And so, the government has to spend.
We are in that very rare situation, in my view -- it occurs in the West perhaps once every 70 years. It's a situation described by the famous English economist, John Maynard Keynes. It's a situation of deficient demand.“
Watch the whole thing. Or read it. There is nothing going on, in this world, right now that is more important than this issue. Here’s an incentive for my conservative friends. Mr. Wolf is very critical of how the Obama Administration is handling the situation. And I agree with him.
As to how we prevent it from happening again, we jump to Prime Minister Harper.
”HARPER: No, you don't need to reinvent it (capitalism). And I guess -- I'll be frank, Fareed. Part of my frustration with the current situation is, you know, we've known from the past -- I mean, we knew from the 1920s -- that an unregulated, completely unregulated financial sector would lead to -- would lead to pyramid selling and all kinds of equivalent problems.
So, in a sense, you know, we're going back and relearning some lessons that I thought had already been learned “
Two points of interest. Prime Minister Harper just happens to be an economist, and, Canada hasn’t had a single bank failure. No failures and no bailouts. Not one.
” HARPER: I happen to believe that fiscal stimulus measures right now are essential. I'm not generally a Keynesian. But when you have the kind of drops in economic activity we're having, and interest rates near zero, and financial sectors and the banking sector not translating investments into saving -- or savings into investment -- you have no choice but to have the government move in, absorb those funds and put them to work.
Now, one can criticize, is it fast enough, is it effective, are the long-run benefits sufficient. But I think the fiscal stimulus does have to be done. And obviously, there's going to have to be major, non-market fixes to the financial sector and to the housing sector.
We're just fortunate in Canada, we don't have to do those kinds of policies, because they're fraught with enormous long-run danger in terms of creating moral hazard risks to future economic decisions.
But we haven't had to do that. As you said, we don't have a bank failure in Canada. And we don't have, on the housing side -- we have also regulation on government housing insurance that's prevented subprime type of situation.
We have a cyclical downturn, but nothing that requires major government intervention.“
Seriously folks, you need to watch this interview too. Or read it. (Scroll down to nearly the bottom of the page.)
The fix has always been as simple as you knew it was. We need to keep a tight rein on the banking system. In a word: Regulation. We learned it in 1929, we forgot it in the 90’s and we are going to learn it again today. But the immediate crisis to address is making sure there is something left to fix.
The Noble-Prize-economics guy from The New York Times, the guy from the Financial Times and the economist who happens to be the Canadian Prime Minister all agree. The government has to spend and it has to spend big. Now. Not next month or next year. Now.
President Obama, you need to call Ben Bernanke and tell him to send in the helicopters. (“Helicopter” economic theory here.)
March 7, 2009