I suppose in that more spending would mitigate the symptoms of the recession and fend of deflation, you’re correct, but this is nothing more than giving the drug addict methadone. Excessive spending, both federal and personal, are the reason we’re in this recession. Credit got really cheap in the name of fighting off recession (sound familiar) leading to more spending. People felt like they were rich, because everyone around them was taking equity out of their home and buying sports cars, so they everyone else did the same. The ride is now over and it’s payback time and it’s going to be painful, period. Increasing spending may mitigate the symptoms, but it will not solve the problem.

The one thing that I agree with is that deflation is a bad thing. However, we need not prevent deflation by engaging in deficit spending. It’s really quite easy. Since we have a fiat currency, we could print up money and put it into people’s checking accts, much like the last economic stimulus. Sure, much of that money went to pay down debt (if only the gov’t would do such a thing), but that increases the money supply. Sure, it’s inflationary, much like deficit spending, but without the deficit spending part. We should demand our gov’t live within its means like all of us have to because we’re not allowed to print money. Fight deflation, sure, but do so with the printing press and by giving the money to people. Keynesian economics created the bubble and the current situation is the fallout. No more methadone!!!

So not sure why, but I didn’t see any of these replies come into my inbox until this most recent one. Let me reply to a couple of points made. First, Sunder, Keynesian economics most certainly did create this bubble. Here’s why. Subprime lending was not a possibility with market interest rates upwards of 8 – 10% for 30 yr mortgages back in the late ‘90s/early ’00s. I mean what low income person could afford that high an interest rate. Not to mention, for lenders to cover their risk of the subprime borrower, they’d be inclined to charge slightly higher than market rates to insure. WIth the cost of money and the risk of the borrowers, they simply couldn’t write loans for these people because they didn’t make enough money. However, things changed as the Federal Reserve decided they needed to stave off recession after 9/11. Greenspan starting dropping the discount rate like crazy as a result. This had the effect of decreasing the cost of money for lenders, so the same house was still about the same price, but money was significantly cheaper. Now, owed to federal monetary policy targeting unemployment rather than inflation, lenders saw profit motive to lend to subprime borrowers. This was a monetary phenomenon that would never have happened absent Keynesian economic policy that Greenspan decided to run with probably under pressure from President Bush (you know, recessions are bad for incumbent re-election). Yes, banks that ultimately made lots of loans to high risk borrowers are going to pay the price (think Wamu, Wachovia, etc), but their calculations were only made possible via our fiat currency and Keynesian monetary policy of targetting employment rather than inflation or commodity parity. This same occurrence resulted in risky banks showing great financials at first, forcing more conservative companies to test the waters to keep up pace. Again, I think banks that made bad loans should suffer the consequences, but we need to be smart enough to recognize our fiat currency and Keynesian economics allowed this to happen.

Tommy, gov’t spending stimulates the economy much like you would be better off in the immediate term if you racked up your credit cards and bought a bunch of stuff you wanted. You would certainly feel better off in the short run given all the new stuff you acquired, but once the bills started coming in, it wouldn’t be so hot would it? The reason the gov’t has to spend during recessions is no one else will voluntarily, because they know better. The gov’t, which evidently only has to answer to the dumbest 50% of Americans, will engage in suboptimal spending during recessions to mask the symptoms of the recession. It’s essentially a sedative they’re giving us so we’ll stop breathing down their necks. At the end of the day; however, that spending has to be paid for somehow. The fact that the gov’t had engage in the spending virtually ensures that the spending will be less than economical, which means that our taxes are being wasted on anything possible (roads, stimulus packages, corporate welfare, sex change operations for gov’t workers, whatever) just to make sure money is artificially being pumped into the system. Ultimately, the question is this. When times get tough, do you pull out the credit card and spend money you don’t have?? If yes, then I feel sorry for your loved ones who depend on you financially, because that’s the wrong answer. Individuals need to be thrifty in bad times to protect themselves. I’d really like to hear the argument that says the gov’t should do the exact opposite.