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Sunday, June 29, 2008 11:05 PM

Shiller's Keynesian Claptrap

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The proposed solutions to the current economic crisis are getting more and more absurd. With that in mind, I am going to be blunt.

Robert J. Shiller's article One Rebate Isn’t Enough is the most ridiculous proposal from an economist I have seen for a long time. And that's saying a lot.

Shiller proposal is based on totally discredited logic developed by John Maynard Keynes, that to fix the economy "we should be putting in place another stimulus package like the current one, and stand ready for another after that, and another."

It would be impossible to be more wrong. We are in this mess because consumers and the government were both spending more money than they have, year in and year out, racking up debts well beyond their ability to finance them. Financing our consumption boom fell on the backs of foreigners. In turn the dollar has been collapsing, sending the price of oil skyrocketing, further adding to consumer woes.

Rather than admit the complete asininity of this arrangement, Shiller proposes we should be ready for three more rounds of it.

  • Nowhere does he address the consequences of the dollar were such a policy to be followed.
  • Nowhere does he address what would happen to interest rates and housing were the Fed to pursue such actions.
  • Nowhere does he bother to consider that the problem was reckless spending so the solution cannot possibly be more reckless spending.
The pool of real savings has been exhausted. It cannot be replenished by spending more. That is a simple statement of fact.

The bust we are in is the price we pay for past foolishness at the personal level, the state level, the corporate level, and the federal level. There is no magic cure, and we desperately need top economists to admit it.

Instead, Shiller is proposing the solution for debt is to go deeper in debt. If printing money was the answer to problems, Zimbabwe would be the most prosperous country in the world.

If one wonders why we are in the mess we are in, one need only look at the economic policies of Greenspan and Bernanke, based largely on failed Keynesian economic models just like the one Shiller is proposing.

Such proposals all depend on the ability of the Fed to perpetually blow bigger and bigger bubbles, each making the problem worse. Eventually the point of Peak Credit is reached where it is impossible to cram more "stimulus" down the throats of businesses, banks, and consumers.

Robert J. Shiller, professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC, would be advised to take another look at Tulip Mania, the South Seas Bubble, the John Law Mississippi Bubble, the Florida Real Estate Craze, and the Great Depression. And if those are too distant, how about a look at the housing bubble that was blown in the wake of the dotcom crash?

Close examination will show the idea of throwing money at collapsing bubbles is precisely the worst thing to do.

Mike "Mish" Shedlock
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