A little under a year ago Moody’s Mark Zandi and Princeton economist and former Fed vice chairman Alan Blinder penned a paper titled “How we Ended the Great Recession” which did nothing but extoll the virtues of spending trillions in both fiscal and monetary stimuli and preventing U3 from hitting 16% (of course how one proves a counterfactual is irrelevant: just remember – if the Fed disclosed its top secret bailout plans the world would end. Same thing here – accept it – after all the guy is a professor at Princeton). In a nutshell Blinder is nothing but Paul Krugman on steroids: a man who believes that there is nothing worse in this world than establishing fiscal (and monetary) discipline now. Well, in an interview with Tom Keene earlier, Blinder fired the first shot across the QE3 bow, telling his Bloomberg host that the US needs “somewhat more” fiscal stimulus once again in order to boost employment (hold on: didn’t we end the Great Recession, and certainly the normal one in the summer of 2009 according to the NBER?). How this would be accomplished in the current climate is not explained. Instead what Blinder says makes one wonder just who is on the tenure committee at Princeton – when asked how we bring the deficit in without austerity, the Princetonian responds: “Unfortunately I think it is very subtle for most political processes especially for the political process in the US. What we should be doing is somewhat more fiscal expansion but at the same time legislating into law fiscal consolidation for the future. Starting 2 years from now, 3 years from now, 18 months from now. But not now.” Of course never now: why bite the bullet now when it can be kicked to some other administration in the indefinite future? Especially when tenure money and/or Wall Street bribes are at stake…
Basically, let’s just incur as much debt as possible now, and eventually it will get better. And this is happening now almost 2 years after the recession supposedly ended. Naturally, there will be no fiscal expansion: not with the current political set up. Which leaves just one option – monetary stimulus. And since Blinder is very close to the Fed, we are confident that the two-way dialog between academia and Federal Reserve is already under way, making it clear that if no fiscal stimulus will be forthcoming, then QE3 certainly will have to take its place. Especially now that the Economy has once again taken a turn for the worse.
That said, we have to thank Mr. Blinder for providing the first direct evidence that the prevailing throught among the Princetonian circle is one of further stimulus. The only question is whether it will be fiscal or monetary.
We believe that with this the opening salvo for more cash demands, which will be met with staunch opposition in D.C., thereby kicking the ball back to the Fed (which already is doing everything in its power to deflate all commodities as rapidly as possible – a trend which will sooner or alter engulf risk assets as well) the only alterantive is monetary. Aka more quantitative easing. And when that becomes apparent, and when Goldman’s Jan Hatzius is firmly on board, the full court press for another round of easing can begin.
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