Wednesday, December 17, 2008

The second mistakes

Since October of 2008, the motivation behind the effort in rescuing Wall Street thus the economy follow closely to the idea that the U.S. policy makers should avoid making the same mistakes during the Great Depression again. In terms of monetary policy, Ben Bernanke has by now cut the federal fund rate close to zero and the balance sheet of the Fed has ballooned in all possible ways that Ben can think about. On the fiscal policy side, the President-Elect Obama's stimulus package is in the making and Paul Krugman has suggested that the size of the package should be similar to the size of the financial rescue plan.

Both kinds of policies are aiming at the increase spending, directly or indirectly through increase in lending (leviating the credit crunch). While in avoiding a second mistake like the government made during the great depression, Jim Hamilton pointed out that we should also try to avoid a second mistake which lead us to the current situation, namely, very low savings thus investment in the U.S. economy. Hopefully, the future investment plans can pay off. One concept need some clarification is that the government spending in this situation should be considered and should be investment into the future, not just buying bombs and drop them in the middle east desert. On the other hand, Paul Krugman put his bet on the spending from the super rich class, not the middle class. Traveled too much Paul?

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