Hayek Is Wrong, And So Is Bernanke
Srinivas thinks it’s time for more fiscal stimulus, not less. “Not all economies can print IOUs, but the U.S. can” he explains. Spending cuts will tip the economy into recession. “A Hayekian decline,” the economist says, “will destroy the social fabric, and it’s not clear that the economy will pick up as before.”
Taking a Hayekian stance would imply cutting spending and forcing a deflation so that asset prices would return to a point where they reflect the underlying value of assets. In other words, letting the price mechanism, and not a distorted, intervened market do it inefficiently. Srinivas agrees the price mechanism is the most efficient resource allocator, but he doesn’t believe it is necessary suffer the blow of a mass deflation. “It’s just better to manage the decline rather than having a huge explosion,” he says.
But, with political gridlock in Washington, weak political leadership in both parties, and an absolute reluctance to spend more, Srinivas is pessimistic. "This depression will last most of the decade," he says.
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