The Hindu Business Line : We are still relevant, say monetarists

Opinion is divided on the strength and speed of the US economic recovery. President Obama, US Fed Chairman Ben Bernanke and a section of the market talk of glimmers of revival and ‘green shoots’, suggesting the worst is over. They have, among others, the slightly better data on retail sales, manufactured goods orders and home re-sales in the past weeks in support. The Dow Jones Industrial Average, beaten down to 7,000 levels, has since seen a sharp upward burst to over 8,000. In forecasting parlance, it is a leading economic indicator.

Stoking the bulls further is the narrowing of spreads in the inter-bank market and on bonds. Diminishing risk premiums are a sign of improving confidence.

Cut to the formidable Nouriel Roubini, who correctly predicted that the housing boom would end in tears, followed by a recession. That was way back in 2006, at the height of the market. More recently, he was once again right in his assessment that bank write-offs would be far more than in the first round. Roubini’s estimate of the final cost of the US Government’s bailout has proved to be deadly accurate.

Bear market rally

So what is he saying now? Not very soothing to the optimists. He thinks the current upsurge in stock prices is a bear market rally and we are still not over the recession hump. More losses on the housing front and others like credit card receivables are in store. Still, he thinks Obama is on the right track.

Surprisingly, those opposed to stimulus spending and easy money — call them the monetarists — do not contend these measures will not work to pull the chestnuts out of the fire. Their fears are about the — in some cases a distant — future. Short-term gain vs long-term pain is how one commentator puts it. In time, the consequences would be a huge build-up of government deficits, debt and runaway inflation.

It is the monetarists’ faith in tax cuts to revive the economy that puzzles. They have a touching belief in the rich and corporates, benefiting from a post-tax increase in incomes, will invest and create the jobs for a sustained recovery. That could take time. But we must be patient. The excesses, especially of those who borrowed beyond their capacity to buy homes, must be punished and wrung out of the system. It is not clear what we should do in the meanwhile with the jobless and homeless. Open huge soup kitchens? Build mass housing shelters?

Echoing the above, hundreds of economists, including a few Nobel laureates, wrote to President Obama opposing his policies and favouring tax cuts. The idea seems to have been more to make the point that monetarism and monetarists are not dead and they would rather repose their trust in the same institutions and individuals that got us into the mess in the first place.

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