With the United States government once more getting the taxpayers to bail out a hopeless business, this time announcing it would pump $6 billion into GMAC Financial Services, including $1 billion for General Motors, with the Troubled Relief Assets Program (TARP) turning into a giant slush fund and with the incoming administration of Barack Obama preparing a two-year fiscal stimulus package that could end up costing something close to $1 trillion, questions are being asked whether we are all turning into followers of John Maynard Keynes who, according to some, can lay claim to playing a crucial role in saving capitalism and, perhaps, civilization during the Great Depression.
Keynes argued that governments abandon that almost religious belief in balanced budgets and break the spiral of recession or depression by borrowing to finance public spending that stimulated consumer activity and restored business confidence.
Martin Wolf in the Financial Times argues we are all Keynesians now.
wolf writes: "Keynes's genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.
"This same moralistic debate is with us, once again. Contemporary "liquidationists" insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.
"Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care."
Wolf has a point.
But what worries me is that when governments spend money, they have to get it from from somewhere. That usually means higher taxes. And if you don't raise taxes, you have to borrow it which is a real concern given that the US is now a debtor nation with minimal reserves and enormous foreign debts. Which in turn raises the question of whether Washington can continue to throw good money after bad to save the US economy before foreign investors tell the US government to get nicked and say they will stop providing credit. And there is a third way: you print more money which undermines and ultimately reduces the value of the stuff already in circulation.
In the end, there are no simple or easy solutions here. Only painful ones, like a recession.
no comment untill now