Recently, I posted a video of Peter Schiff making the argument for small government and resisting economic stimulus. As I see much to like in Peter Schiff’s views, I sympathize with the broad themes of his message. However, I do not feel he is realistic about what is politically feasible or understands the negative consequences of a ‘let them eat cake’ approach to governance.
Nevertheless, I would have to admit I sounded a lot like Schiff a few months ago and that I have ‘evolved’ away from his viewpoint. Reader Stephen rightly asks “Does ‘Depression Economics’ Change the Rules?” So, the questions I ask myself in this evolution are the following:
- What was I saying before the panic in September?
- What can I learn from the views I expressed before the panic?
- Am I arbitrarily changing tack to fit the prevailing wisdom?
With that in mind, I wanted to make this Links post a look back at a few posts I made prior to the Panic in September, comparing them to my thoughts afterward. I will follow up with a summation. Consider this another exercise in intellectually honesty.
Low savings, high debt and interest rate policy – Jul 2008
Why No Outrage? – Jul 2008
The US Economy 2008 – Mar 2008
What is inflation? – June 2008
The inflation – deflation debate redux – Aug 2008
Chart of the day: Japan 1984-2004 – Jul 2008
Credit deflation and the Japanese problem – Jun 2008
A brief philosophical argument about the role of government, stimulus and recession – Dec 2008
Quantitative easing: printing money like mad to ward off deflation – Nov 2008
What does Mises say about trying to stimulate the economy out of recession – Dec 2008
Confessions of an Austrian economist – Dec 2008
Beware of deficit hawks – Nov 2008
In this review, I was fairly happy that I have held to the same view regarding the likely outcome regarding inflation, the banking system and writedowns. On the other hand, you should notice a definite shift in views about government stimulus. The post about Japan, “Chart of the day: Japan 1984-2004” is probably the clearest example of this. How do I explain this shift?
Before Lehman Brothers went bankrupt, I felt that the global economy could reasonably expect to recover from a mild depression if governments were quick in liquidating bankrupt banks and companies, using an expanded social safety net to mitigate negative consequences for workers who found themselves caught up in this mess. A 1921 sceanrio might have been a template here.
However, in my view, the Bush Administration has been excessively beholden to the financial services industry in its crisis management. They have dragged their feet on reform and industry consolidation. This has also been true in much of the rest of the world. The result is a banking system that is clogged with toxic assets and insolvent companies masquerading as solvent enterprises. Such a climate creates distrust, fear and a severe reduction of lending. Moreover, fractional reserve banking is inherently unstable, as it relies on confidence and trust in order to function. When that trust is lost, the instability at the core of the system becomes apparent.
Consequently, my position on economic stimulus and government action has evolved. What I see is the potential for systemic collapse of a 1930s variety and civil unrest worse than what we are seeing in Riga, Athens or Vilnius. Some ideologues might say this is the price we must pay to return to a more prudent economic and financial environment. I am much more practical than that. I believe that these are outcomes to be avoided and that government must be an integral part of how to avoid them. This view is ‘Keynesian’ if you will.
While you may disagree with my conclusions, I encourage you to hold my feet to the fire, and I do hope you appreciate the analysis.