The Stimulus Trap

The Weekly Standard with a great piece on the potential ineffectiveness of Keynesian economic models in today's current downturn (Thanks to reader Tim).

Pretty much everybody seems to agree that the economy needs stimulating. They agree on this because the United States has been in recession for more than a year and the outlook is bleak. There aren't a lot of options left to policymakers. In most recessions, the Federal Reserve increases demand by manipulating interest rates. But, in December, the Fed effectively lowered those rates to zero and lost a lot of its leverage over the economy. The nation's central bank now has to rely on other forms of monetary policy--mostly printing money--in order to help the United States pull out of recession. But that might not be enough.

By keeping interest rates so low for so long over the past decade, then lowering them some more after the recession hit, the Federal Reserve stumbled into a "liquidity trap." You get caught in a liquidity trap when monetary policy loses its effectiveness even though interest rates are at zero--just like today. It's as though the Fed has been dancing the limbo and has finally reached its limit. Rates can't go any lower to get money moving. The central bank has done all that it can do.

Let's put this into hip hop lexicon. Think of our economy like a crack whore. The feds have been artificially injecting liquidity into the market for years in the form of low interest rates and regulatory demands on banks to loan to dead beats. This created a huge boom in the business cycle and now that the economy is drawing down, it feels like a hangover.

It mirrors a crack whore in that it takes more and more crack to get the same high you use to get for $10.00.

Our economy is no different. The Obamamaniacs think that it's going to take trillions to turn around an economy that's been living on $300 billion deficits for years. Well it probably will until that next business cycle downturn... then it will take quadrillions or whatever denomination lot's of trillions are, to make another recovery.

To paraphrase Nancy Reagan, "Just Say NO!"

Now pass me the pipe.