Fixing The Economy

Paul Krugman's Franklin Delano Obama? is worth a read.

"Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today’s world? The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious." He goes on with some history of the New Deal and again, it's really worth reading.

He followed it up with Stimulus Math. "When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion. That’s twice what the unreliable rumor says. So if there’s any truth to the rumor, my advice to the powers that be (or more accurately will be in a couple of months) is to think hard – you really, really don’t want to lowball this."

Robert Reich says basically the same thing but with more of an explanation in The Mini Depression and the Maximum-Strength Remedy which is also worth a read. Consumers are tapped out and not spending so the economy is stalling, businesses aren't investing and the rest of the world is affected too so exports are down. That leaves the government to spend and it should invest in infrastructure, health and child care.

For more reading, here's a review of the upcoming book The Great Inflation and Its Aftermath: The Past and Future of American Affluence by Robert J. Samuelson. If the book is half as interesting as the review it should be great.

And on the actual bailout that's happening, James Kwak writes The Overpayment Begins. "Today’s government re-re-bailout of AIG can be hard to follow, but one provision is the creation of a new entity with $5 billion from AIG and $30 billion from the government to buy collateralized debt obligations (CDOs). The goal is to buy CDOs that AIG insured (using credit default swaps), because if those CDOs are held by an entity that is friendly to AIG, that entity will no longer demand collateral from AIG. The theory is that in the long run these CDOs will not default and that the new entity will make money on the deal." He goes on to say that the 50 cents on the dollar they are paying is more than they are worth and in the case of default, AIG still has to pay.