A friend who is much, much smarter than I writes in an email:
"This is a new epoch, until now the Fed sanitized inflation, and Congress and the President were free to spend. The deficits came at the price of higher interest rates, but we allowed some interest rates to be subsidized, namely housing. Housing was over-developed because it was under priced. Now the Fed is going to have to have interest rates pegged low, because of interest on the deficit, the need to keep housing propped up, the need to directly loan, and the need to provide such stimulus as can be had. Therefore, the fiscal authority will have to control inflation. One reason that politics had been so polarized is that those who controlled the treasury could rob everyone, to pay their constituencies with pork. When this decade we both spent, and had low interest rates, it gave out. Not in the ways that perhaps people expected, but a credit bubble leading to a panic is a perfectly 19th century thing to do. If Krugman joked that 2001 was "your grandfather's recession" then this is great-great grand pappy from 1873's "Panic".
The time when politicians could spend irresponsibly and allow the Fed to clean it up is over. This doesn't mean budget cutting per se, we are going to be running deficits. The question is what we are going to be buying with those deficits. Presently we are buying a war in Iraq, happy billionaires that get tax breaks that we then pay for by borrowing the money from them.
Everyone is a liberal now. The question is who is going to be a smart and honest liberal, and who is going to try and pretend that there is another round of Reaganomics for us all."
That's a damn good question. |
