Reflating the ponzi

Well, thanks to what appears to be the biggest scam in the history of mankind I currently have more time on my hands than is strictly economic. Every cloud has a silver lining though and on what the BBC say is the gloomiest day of the year with most workers returning to the trenches after the festivities, and with an absence of anything better to do, To Believe is to See is back ... 

At the weekend there was a conference held by the San Fransisco Fed at which the economy experts who not so long ago scoffed at the idea that the current slump might turn out this badly agreed on the need for "unprecedented" stimulus to ward off what, e.g. former governor Mishkin called an "unprecedented" crisis. Interestingly, bleating along with the rest of the herd was Chicago Fed president Charles Evans who as recently as October 2008 was publicly fretting about inflation expectations becoming embedded in the economy. With monetary policy already in completely unchartered waters their call is now for similarly aggressive fiscal policy. 

Why? Because we're all slaves to a defunkt economist of our choosing. In the absence of such stimulus, we are earnestly assured, the economy will do what the US economy did after the Crash of 1929, or what the Japanese economy did after it's crash of 1989. How do we know this?Because that's what the theoretical models tell us and what history demonstrates. Only an idiot wouldn't see something so obvious. 

That the same body of theory at best failed to anticipate the current mess and at worst caused it isn't something too many people seem to be dwelling on. Neither is the possibility that that we may have learned the wrong lessons from our two illustrative episodes of choice. The truth is that the US in the 30s and Japan in the 90s aren't the only examples of post-crash economies we might be able to learn lessons from. Off the top of my head, the UK in the early 90s, all of the Scandinavian economies in the early 90s and the Asian economies in the late 90s suffered extreme macroeconomic post-bubble distress without suffering the "lost decade" currently being peddled as the inexorable trajectory we'll be on without such measures. 

Indeed, the Asian economies recovered pretty smartly from a crisis far worse than the current one despite the IMF imposing the harsh stabilisation policies of fiscal and monetary constraint in the name of restoring credibility - incidentally, the very same policies which supposedly caused the Great Depression. I bet we end up overstimulating.