DeLong is Pessmistic

Here in an article by Brad DeLong in the Shanghai Daily that gives his pessmistic view on economic recovery:

Are the world's governments capable of keeping the world economy out of a deep and long depression? Three months ago, I would have said yes, without question. Now, I am not so certain.

The problem is not that governments are unsure about what to do. The standard checklist of what to do in a financial crisis to avoid a deep and prolonged depression has been gradually worked out over two centuries: by Bank of England Governor Cornelius Buller in 1825; by the Victorian-era editor of The Economist, Walter Bagehot; and by the economists Irving Fisher, John Maynard Keynes, Milton Friedman, among many others.

The key problem in times like these is that investor demand for safe, secure, and liquid assets - and thus their value - is too high, while demand for assets that underpin and finance the economy's productive capital is too low. The obvious solution is for governments to create more cash to satisfy the demand for safe, secure, liquid assets.

As Keynes liked to say: "Unemployment develops ... because people want the moon" - safe, secure, and liquid assets. "Men cannot be employed when the object of desire [ie, money] is something which cannot be produced and the demand for which cannot readily be choked off." The solution is "to persuade the public that green cheese [ie, the notes printed by the central bank] is practically the same thing and to have a green cheese factory [ie a central bank] under public control ..."

...

Three months ago, I said that there was considerable disagreement about these issues, but that two things were certain. First, we do not know enough about when, under what circumstances, and in what order governments should resort to these checklist items.

Second, trying a combination of these items - even a confused and haphazard combination - was better than doing nothing. All five of the world's major economies implemented their own confused and haphazard combinations of monetary, fiscal, and banking stimulus policies during the Great Depression, and the sooner they did - the sooner each began its own New Deal - the better.

Japan and Britain began their New Deals in 1931. Germany and the US began theirs in 1933. France waited until 1936. Japan and Britain recovered first and fastest from the Great Depression, Germany and the US followed well behind, and France brought up the rear.

The conclusion that I draw from this is that we should try a combination of all checklist measures - quantitative monetary easing; bank guarantees, purchases, recapitalizations, and nationalizations; direct fiscal spending and debt issues - while ensuring that we can do so fast enough and on a large enough scale to do the job.

Yet I am told that the chances of getting more money in the US for an extra round of fiscal stimulus this year is zero, as is the chance of getting more money this year to intervene in the banking system on an even larger scale than America's Troubled Asset Relief Program (TARP).

There is an 80 percent chance that waiting until 2010 and seeing what policies look appropriate then would not be disastrous. But that means that there is a 20 percent chance that it would be.

History repeats. The same fears and hesitancy held back FDR and caused hiim to prematurely "balance" the budget and cause a second sharp economic decline in 1937. Sadly, too many people in important positions don't know enough to make appropriate decisions. Supposedly we live in a meritocracy but the idiocy at the top looks very much like an aristocracy where the idiot offspring are left in charge.