Monday, January 18, 2010

Crowding Out: The Case Against Keynsian Economics

Obama's permanent depression
By Spengler
Oct 6, 2009

This article makes an impressive case against Keynesian (deficit) spending.

Crowding Out - Deficit spending and easy terms from the Fed create a situation where banks find it easier to make money from government bonds than from lending money to the private sector. The more the government spends in an effort to boost the economy the more it crowds out the private sector.

This article argues that the Obama administration is doing more harm than good because it is acting on some misconceptions:

1) They are acting as if Americans save too much and spend to little when there is really an almost bottomless demand for savings now due to past profligacy and the decline in asset values.
2) They are acting as if the money for the deficit spending comes out of thin air when in fact it is sucking up savings that could be put to use in the private sector.
3) Cheap money is not encouraging private lending by making it profitable to borrow short term from the fed to buy med-term treasuries.
4) Cheap money is also creating a stock bubble because the falling dollar has encouraged foreigner to buy cheap stocks.
5) Why should banks make risky private loans when they can make a nearly risk free return on treasuries.

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