Comment on Economist debate – March 14, 2009

I have been thinking about this for a couple of days. When the opportunity came to comment on the Economist debate on Keynes.

Stimulus is not the problem. The question is in what is to be stimulated. Truly, there was a major policy error in the early 1980s by entering into a monetary policy regime that would generate low interest rates without giving commercial banks some other way to earn money on interest rate spreads. Banks exercised their prerogative to create new money based on junk -- junk credit card credit, junk subprime credit, and junk derivatives, spiraling down for thirty years into the murk. They could create money, so they did. Our problem is derived from a lack of attention to the principal factors of economic growth. We have a blunderbuss approach to stimulus -- so far rewarding the perpetrators of the problem. From a policy standpoint, here is what we need to do: (1) Establish a legitimate means of making money for commercial banks that does not compromise on monetary policy. Perhaps some should be allowed to drift back toward the Glass-Steagall (sp?) approach, where they can experience equity gains from their instruments while the others manage lower credit spreads and serve as agents of the Federal Reserve; (2) Focus on the needs of the entrepreneurial/growth community, those who can and will "innovate" our way out of this mess. In addition, perhaps works projects could be organized to support the efforts of seasoned managers and engineers from key industries whose innovations have been truncated. (Ford Motor, for example, recently announced that it is looking back seventy years to implement innovations that had been killed internally.) The results of such works projects could be "picked over" by entrepreneurs and venture capitalists; and (3) Investigate ways of segmenting economic sectors between growth, maturity, and decline and establish fiscal policies that would match the benefits and requirements of organizations in each sector and the people that support them. If you want growth, reward the innovators. If you want stability, establish policy to encourage such in the corporate sector. If you want social stability, establish criteria and benchmarks for dealing with organizations in decline. It happens all the time. Why should we be surprised? Of course, this crisis is of a greater magnitude because organizations in the financial sector that puffed themselves up had the ability to create money in the process, whereas availability of cash should be the final constraint on firms in a competitive environment. Finally, dust off anti-trust and anti-innovation legislation and policy to assure that established corporations do not exercise their powers to forestall market-based competition. We need to re-oil the machine and specifically target the results we need.