Economic Stimulation

Economic stimulation projects do not always work, but often they do. The problem is that policies that work, but still be morally wrong. Bad policies can have good outcomes. When assessing any economic proposal, the most important issue to assess is its morality. Policies that are morally flawed may have short term benefits, but in the long term they will lead to further harm.

There are lots of things wrong in the US economy.

• Households have taken on too much debt.
• House prices have been pushed too high.
• Too many houses have been built in many places
• Many business have been poorly run (eg GM, Chrysler, AIG)
• Banks made too many loans to too many people that could not afford them.
• Banks have been too highly leveraged.
• Bankers have depleted capital by creaming off large profits and bonuses.
• Some banks have lost all their inadequate capital.
• The banking system is seriously flawed (see Bank Loans and Deposits).
• The Fed over stimulated the economy after the tech wreck in 2000.
• The Fed over inflated during the IT boom.
• The Fed exacerbated the housing boom.
• Households consumed more they could afford.
• Businesses have produced stuff that no one wants.
• Rating companies under- estimated the value risk of default on some assets.
• Banks and investment funds brought asset backed securities and collateralised debt obligations that were not back by solid assets.

Many of these actions were immoral. Most involved foolishness and folly, arising from arrogance and hubris. Government stimulation can cover the symptoms of these problems, but does not deal with the underlying moral issues. The only solution to these problems is a good does of repentance followed by and change in actions and behaviour.

Stimulating a stressed and distorted economy is like drinking whiskey to cure a hangover. It may bring temporary relief, but it does not deal with the short-term foolishness and long-term immorality.

The quantitative easing recently adopted by the Fed operates in the same way as criminal counterfeiting of currency. The difference is that the initial benefit under quantitative easing the initial benefit goes to businesses, whereas under counterfeiting the initial benefit goes to the crooks. Otherwise, the two methods are morally equivalent.