Do Keynesians Laugh When They Tickle Themselves?

On Charlie Rose last night, Charlie played straight man to Larry Summers. “What economist has influenced you most?” Charlie asked. “Keynes,” Summers answered, trying to look like he wasn’t saying something obvious, “Keynes.”

Keynes understood psychology, but there is something about human psychology that all this end-of-days talk about Keynes misses. When the government throws money at the populace, and keeps describing it as a Hail Mary pass they regret they have to make, it must vitiate the effect of the stimulus itself. The first time Keynesianism was used, it was a surprise move to a nation that wasn’t an expert on economic theory; the second time around, everyone knows what is supposed to happen, and that can’t be good. In human affairs, history matters.

Penicillin works even if they tell you they’re going to give it to you, maybe even better. But people’s minds are different from people’s bodies. Is a stimulus so stimulating when they keep telling you they are going to stimulate you? Can you get excited when everyone around you is watching to see how excited you get?


Originally published at Wilmott.com and reproduced here with the author’s permission.

2 Responses to "Do Keynesians Laugh When They Tickle Themselves?"

  1. Richard4691   February 17, 2009 at 5:35 pm

    James, Why do we need to create new good banks when we already have hundreds if not thousands of good banks in this country that have come through the crisis unimpaired? Wouldn’t it be easier, and more in line with our traditions, to encourage the stronger survivors to grow as opportunities arise from the weakness of competitors? Wouldn’t it be better for taxpayers to have their money put into the hands of successful managers? A notable aspect of our current predicament is the extent to which the government has been driven into emergency responses to the prospect of impending systemic failure. A reasoned approach to the situation might involve a gradual shrinking of asset concentrations at too-big-to-fail banks, which could be achieved through a gradual migration of deposits and assets to sound institutions. Elsewhere I have suggested that both the crises affecting big banks and problems caused by certain mortgage backed securities (and derivatives) could best be handled though a process of gradual defeasement, with relief to delinquent, underwater homeowners and a reduction in foreclosure-related evictions delivered though government guaranteed and repurchasing programs administered by regional and community banks, the good banks. It would be so much easier to givehomeowners the financing to buy back their homes at foreclosure sales or to have a government agency enter into sale/leasebacks with existing occupants. (The public policy interest lies in stability of communities and in the cost of shelter.) Foreclosure can be seen as an auction process that reveals the market price of the asset underlying the mortgage backed securities. A government program that prevents foreclosed properties from piling up on the books of lenders (including holders mortgage-backed securities) will eventually put a floor under home prices. Until that happens, we will be continually throwing good money after bad to stave off a meltdown. What does anybody think a meltdown looks like, anyway?

  2. Michael   February 18, 2009 at 8:21 am

    I build up a couple of new banks. Does the writer of this article have any idea how long it takes to build a new bank??? Especially looking at the size of these new banks?If building a new bank is such a good idea then I would expect there are enough private investors out there who are willing to invest money in a new “good” bank.If the government would build new good banks – what will happen to the existing good banks? The new competition would kill also the healthy banks! Do not forget – the banking sector has to shrink and not to grow.