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Stimulus or Depression?. Steven Kyle Cornell University February 2009. Christmas Spending Plans Year Average Spending Percent Change. American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults. What Will 2009 Look Like?. Still a way to go down in real estate

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stimulus or depression

Stimulus or Depression?

Steven Kyle

Cornell University

February 2009


Christmas Spending Plans

Year Average Spending Percent Change

American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults

what will 2009 look like
What Will 2009 Look Like?
  • Still a way to go down in real estate
    • Commercial real estate just starting
    • House prices still need to fall
  • Stimulus won’t kick in right away
    • Only just now signed into law
    • Further lags after that
  • Monetary Policy all used up
  • Consumer Confidence still at rock bottom
will it turn around
Will it Turn Around?
  • IF we get a big enough stimulus then yes
  • Eventually, ratios will return to historical levels
  • See for example
    • Autos
    • Household debt
the gap in demand
The Gap in Demand
  • GDP = C + I + G + Net Exports
  • C is down – People have rediscovered savings
  • I is down – Why invest if nobody is buying?
  • NX is down – The rest of the world is in recession also
  • That leaves only G able to expand
what kind of stimulus
What Kind of Stimulus?
  • DO
    • Make it soon
    • Contribute directly to immediate spending
      • Extend Unemployment
      • Aid to state government
      • Aid to already-in-the-pipeline projects
      • Try to promote long run growth where possible
how much
How Much?
  • Historical Context
    • WW2 is what got us out of the Great Depression – Deficits ranged as high as 25% of GDP – That was likely more than enough but still, it was huge
    • Chinese just announced stimulus of 20% of GDP
  • Goldman Sachs estimate of current gap at around 10% of GDP
  • Too much less dangerous than too little
pushing on strings
Pushing on Strings
  • Don’t think that tax cuts will necessarily be spent
    • Consumers saved a large part of last May’s stimulus check
    • What would YOU do with sudden influx of money?
  • Don’t imagine that incentives to lend = actual lending
    • Banks don’t want to lend for good reason
about those banks
About those banks …
  • Throwing money will work
    • If we throw enough we WILL make them solvent
  • Buying toxic assets
    • The problem is at what price to buy them?
      • If at market price then problem isn’t solved
      • If above market price then we should get ownership
      • But nobody knows the right price because there is no market in these assets
nationalize the banks
Nationalize the Banks?
  • Pros
    • If we are shoveling more money than they are worth then we should get ownership
    • If we don’t get ownership then we are bailing out stockholders and managers
    • If we don’t inflict pain on managers why should they avoid doing it again?
    • Automatic mechanism to recoup bailout money
    • It has been done successfully before
nationalize the banks1
Nationalize the banks?
  • Cons
    • Governments make poor bankers
      • But are they worse than the geniuses who brought us this mess?
    • Ohmygod it’s SOCIALISM
      • But only temporarily – Will sell them back later
    • Politics very difficult