The lack of liquidity is what is constraining the economy. Factory and productive capacity are sitting idle; and that is very economically wasteful.
So if the lack of money is holding off the economic it makes sense for the central bank to inject liquidity into the system.
The Fed buys assets and provides cash to the sellers. The Fed can then hold those assets to maturity if necessary to recoup its investment. The Fed will not lose money because they can hold indefinitely and never have to worry about a fire sale to raise cash.
Some of my most vociferous right-wing friends are real estate bulls who previously bought at higher prices. I claim that they lost money already because their personal balance sheet should reflect current market value (same as banks). My friends, however, content that by holding long enough, they will make money because they will recoup their money and more. That’s essentially what the Fed is doing with the assets they bought from the banks.
IMHO, capitalism is superior to other economic systems because it embraces financial engineering to get economic activity going. More production today results in higher growth in the future.
We always have to look at the data and come up with new ways to grow, or at least to prevent existing capacity from sitting idle and going to waste.
There is no need to be constrained by economic orthodoxy just for the sake of purity. However we can get the economy going, we should do it. Why live with economy deprivation if we don’t have to?[/quote]
Brian: You’re arguing a false equivalence (i.e. if one doesn’t choose your solution, one is really arguing for “orthodoxical purity” and NOT another solution). Krugman excels at this fraudulent type of reasoning as well and thus is unwilling/unable to see other solutions as being valid.
Again, I am NOT arguing for deprivation/depression, but rather am arguing for other solutions. I also have no problem with government “pump priming” a la Keynes, but, if we’re being honest, we’re well outside a Keynesian solution, especially regarding debt (wherein Keynes would argue that the excessive debt we’re now carrying would actually have a deleterious effect on said pump priming being effective).
Krugman has had his head handed to him numerous times by equally smart economists hewing closely to the Keynesian model (and, let’s face it, all of these “solutions” are being driven by models). Krugman has also unfortunately allowed his politics to prevent any serious discussion on the topic without retreating into rank partisanship.
You’re unfortunately falling into the same trap in that you’re allowing your partisan leanings to prevent you from seeing other solutions to the problem as well.
To use your “right-wing” RE friends as an example is also an odious comparison. Their RE holdings and their time horizon have nothing to do with the present situations here in the US, the Eurozone and China, in that the problems encountered there at present are far larger, far more complex and require solutions that are far larger and more complex. Again, the various central banks either don’t have enough ammo left to fight the problem, lack the acumen or ability or lack the political will.
