Bill Woolsey - 8/13/2009

I mostly disagree with Rogoff.

Not only does he ignore the possiblity of reduced government spending, his entire analysis is filled with an interventionist mentality.

Anyway, I think that there has been a deep secondary depression during the last year, and it was caused by a loss of confidence that directly or indirectly led to an increase in the demand for money. There was a large increate in the quantity of money (and especially base money,) but it was not enough. Spending, production, and employment fell way beyond what was needed. But some was necessary...

Why? I think there was a housing price bubble, too much production of housing, and so, a need to reallocate resources out of the production of new homes and finanical problems for banks and investment banks that lent too against housing collateral.

The notion that the whole problem was a lack of confidence seems to me to require that one believe that housing prices were justified, and that demand at these rapidly rising prices could be maintained by continued rapid growth in mortgage lending, which could be funded by ever greater sales by mortgage backed securities, which could be funded by asset backed commerical paper, and ever growing balances in money market future funds. If only there had been no loss of confidence in the investment banks (and Citibank,) then it would have continued forever.... No.

But there was no need for a secondary depression.

The long run fiscal situation continues to be bad. If the government keeps its promise to pay for health care, with health care being whatever a profit-oriented system of provision can show as helpful enough for lobbying purposes, then the trend lines still point to disaster. Sadly, #2 trillion deficits this year are a drop in the bucket (well, mabye a juice glass.)

I don't know that it is sensibe for the Chinese state to accumulate dollar assets. It is certainly possible that it is all due to foolhardy merchantilism on their part. If they stop, that will hurt the terms of trade for Americans. But I think Rogoff's view, at least implicitly, is that the improved terms of trade for Americans today is a problem that government needs to fix.

Personal consumption has been positive. While consumer debt is high, it is evident that some Americans have been saving plenty. If they want to save more, what is the problem? Sure, it would be better if you could retire on the proceeds from selling your house...
Anyway, that some Americans have been consuming beyond what they earn maybe true, but that isn't everyone.