Stimulate Big Soon

TW: Posted earlier about how the discussion was going to shift rapidly from monetary to fiscal policies, this shift is now coming clearly into focus. As a friend pointed out, we have been in substance running a highly stimulative fiscal policy for years in the form of massive budget deficits, he is right. But we are about to test a new concept, running trillion $ deficits instead of hundreds of billion $ deficits. We will not be the only ones running such deficits as most other economies will be running massive deficits as well. A simple conundrum emerges, how do these deficits get funded? I have not heard an answer yet which frankly has me somewhat freaked out. On the other hand, I have not heard a viable alternative solution to running the deficits either (am all ears btw).

From Krugman/NYT:"...Bad as it is, however, I don’t expect another Great Depression [TW good to hear!!]...We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly...

...the standard policy response to a weak economy — a cut in the federal funds rate...was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.

...Rising unemployment will lead to further cuts in consumer spending...Weak consumer spending will lead to cutbacks in business investment plans. And the weakening economy will lead to more job cuts, provoking a further cycle of contraction.

To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices.

One of these prejudices is the fear of red ink. In normal times, it’s good to worry about the budget deficit — and fiscal responsibility is a virtue we’ll need to relearn as soon as this crisis is past. When depression economics prevails, however, this virtue becomes a vice...

My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion. "http://www.nytimes.com/2008/11/14/opinion/14krugman.html