Two theories of recession

Because, as Warsh points out, Obama’s stim­u­lus is being sold as a hang­over cure, per­haps con­trary to the instincts of his advi­so­ry team. The Oba­ma stim­u­lus is pitched to revive demand fol­low­ing a sud­den crash that itself fol­lowed thir­ty years of flat-out eco­nom­ic expan­sion. Kevin Rudd is sell­ing his stim­u­lus on the same plat­form. The sim­ple moral tale behind the hang­over expla­na­tion makes it more polit­i­cal­ly saleable in both coun­tries and, no doubt, it is in tune with the Prime Min­is­ters’ own dis­po­si­tion to employ moral expla­na­tions.

Unlike Rudd, Oba­ma has lit­tle alter­na­tive to a hang­over cure. In con­trast to the Aus­tralian case, there is almost no gas left in the US mon­e­tary pol­i­cy tanks to under­mine an excess demand for cash (by drop­ping inter­est rates).

Most of Obama’s neo-Keyn­sian eco­nom­ic tech­ni­cians would, how­ev­er, pre­sum­ably be inclined to argue that a hang­over cure will be at best weak and tem­po­rary because it address­es the symp­toms not the dis­ease.

Soon­er or lat­er the Unit­ed States gov­ern­ment must address the under­ly­ing rea­son for the excess demand for cash and its coun­ter­part, the freez­ing of cred­it. The under­ly­ing rea­sons are pret­ty evi­dent: fright­en­ing doubts about the sol­ven­cy of the banks. This prob­lem demands the iso­la­tion of bad and un-val­ued debts and the re-cap­i­tal­iza­tion of the banks, includ­ing by par­tial nation­al­iza­tion if nec­es­sary.

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