More damning would be a critique that suggested [this] policy response has been flawed from the outset...Excellent article, and not the last I suspect that will challenge not just this FED program or that, this Treasury purchase or that, but the entire approach of Bernanke and Paulson*. The main problem of these economists - mechanics as they envision themselves - lies in the assumption that the economy is a big machine that the government has the power and responsibility to keep humming.
"Panicky slashing of interest rates a year ago was wrong: lower rates operate by encouraging more credit – just what was not needed. Instead, with Wall Street bulls still rampant, undermining the dollar led to bubbles in oil and food prices, which together contributed to a 2% rise in price inflation in the year to 2008Q3 – equivalent to a 2% global sales tax."
Dumas's argument is that household debt has to come down. Interest rate cuts do not contribute to this process of de-leveraging...
Of course, the government can and does have an impact on the day-to-day workings of that huge network of transactions that make up the economy. Its rules, its spending, its interest rates all marginally affect other transactions, but at the bottom, the economy remains a network rather than a machine. And when a network develops a problem, the solution is not to ram into it more power, but to discover the problem and at least try not to make it worse.
So far, the mainstream economic response to the debt-created tear in the network has been to treat it like a plugged gas line, which could conceivably be cleared by ramming more gas through it at high speeds. Trying to get banks to lend to over-indebted consumers, trying to buy up worthless assets to give banks room to create more, trying to "save" heavy industries that are creating products no one wants or needs, are all pumping gasoline into the machine in vain hope that it can start running again of its own accord.
What they have accomplished, unfortunately, is spraying gasoline over the whole thing and setting it alight.
UPDATE: it ain't over...
U.S. Treasury Secretary Henry Paulson said on Monday that more programs are being developed to stimulate lending but warned a severe financial crisis is stubbornly persisting.Perhaps Obama could find a fat lady for the next Treasury Secretary.
* which is also the approach most likely to be taken by Obama's advisers, at least until they too discover that it doesn't work.