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Blog

    Keynesian Bubble Reinflation

    04/07/2009

    Mario Rizzo at NYU has a great article has a great article in this issue of the Freeman explaining how Keynesian stimulus packages can't restore confidence to an economy.  He argues that in order to restore confidence in the market, which Secretary Geithner has claimed is the goal, we have to fix the causes of the problem rather than the symptoms.  A stimulus package does not correct, even in Keynesian terms, the "collective irrationality" that lead to a housing bubble in the first place.  

    Rather than spending more taxpayer money, either directly through the stimulus or indirectly through government guarantees, we should be investigating the causes of the crisis and preventing future problems to restore confidence to the market.  The housing boom was unsustainable.  Restoring prices to boom levels will not be sustainable either.  Government should let the market correct and allow prices to fall.  Once the prices are corrected, then the market will recover the confidence that the Fed and Treasury have been trying to bring back.

    Read the whole article here.