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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

Stimulus or depression

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