The New York Times / August 11, 2009

Breakingviews.com.
Pushing the Limits of Stimulus Plans
By EDWARD HADAS and ROBERT CYRAN

... No one knows whether the current mix of monetary and fiscal
policies will be enough to bring the recession to an end. But it is
not too soon to draw three financial and economic lessons from the
crisis.

First, imbalances matter. When inflation was low and gross domestic
product growth steady, many economists thought all was right with the
world. But the great two-sided global dislocation — the proceeds of
huge trade surpluses largely invested in global fixed-income [bond]
markets — helped make credit too cheap and all economies more
vulnerable to financial disruption.

Second, debt is dangerous. Central banks, investment bankers and
politicians all signed up to the cult of debt. But companies that went
for balance-sheet “efficiency” [i.e., high leverage?] and homeowners
who took on huge mortgages were caught. It turns out to be much harder
to deleverage than to leverage an economy.

Third, globalization does not work by itself. Free movement of capital
has facilitated rapid shifts in crossborder capital flows, currency
values and prices of commodities. Economies benefited when growth
soared, but were left vulnerable to painful disruptions. Trade binds
countries, but shifting terms of trade can divide them and turn growth
into decline.

The three lessons can be boiled down to one: overstimulated finance
leads to economic woe. Sadly, world leaders do not seem to have
learned that fundamental lesson yet. While trade imbalances have
shrunk, governments and central banks are pushing the limits of fiscal
and monetary stimulation.

[likely, they haven't learned the lessons yet because they appoint
people like Summers, Geithner, and Volcker as advisers.]

A carefully calculated stimulus plan was probably called for, but the
vast programs have been entered into without much consideration of how
they will be unwound. The will to establish a new global financial
order was strong six months ago, but seems to have melted away. Let’s
hope it returns before the next financially induced recession...

Copyright 2009 The New York Times Company




-- 
Jim Devine / "All science would be superfluous if the form of
appearance of things directly coincided with their essence." -- KM
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