Keynes is famous because he prescribed that at times of depression the Government needs to step in and spend where others won’t.
The correct response today is to prepare over the coming weeks a signiificant series of internationally coordintated measures to avoid depression. Any money spent on “unblocking the financial system” will be wasted. When I say wasted I mean that it will NOT help us to avoid a depression although in the long-term (wehn we are all dead as Keynes so aptly put it) Givernmnets and therefore the tax payer indirectly may make money from such interventions (buying toxic assets then selling again in 20 years time for a profit etc…).
The value of money as a mechanism for payment must be protected. Depositors are already amply protected. Borrowers are protected through their loan agreements and by credit regulations. Nothing else is needed in this arena.
As I said on a previous post, £400bn in the UK would go a long way in reducing taxes, both Corporate and individual taxes and infrastructure projects.
Hank Paulson is the wrong man to be involved as is Ben Bernanke – note that it was Benboy or Helicopter Ben to his critics, who scrapped the measure of M3 (broad money supply) in the US which has been growing at over 10%!
Now briefly over to my favourite subject, Goldman Sachs. What does Warren Buffett imagine that he can do with $5bn for a balance sheet of a trillion! Yes, it inspired confidence – for two weeks. GS will probably survive because of its close ties to the men making the decisions however it certainly doesn’t deserve to and its survival will have no impact on whether we hit a depression or not.
Finally, at last, the markets have realised that the consumer is not in a position to spend – at all!. It is this that is spooking them. Soon the Governments will take strong fiscal measures, I hope, to replace and relaunch consumer spending. Watch out though for a package focused on putting money solely into consumers’ hands. This is very tempting politically but wrong. They will say thanks, tuck it away and want some more a few weeks later. Any fiscal package must be designed to force money into the economy to create demand for goods and services i.e. Government funded infrastructure projects whether in health, education or roads. This the Democrats know how to do!