Tuesday, January 27, 2009

Patience and Prudence: Resolving the Financial Crisis

The current financial and economic crises were years in the making. But round-the-clock coverage of the crisis and its hoped-for prompt resolution has the public on edge waiting to hear that the worst is over and the country is on the road to recovery. Sadly, President Obama has dashed these hopes with candid, realistic statements that it could take several years to clean up the mess and restore the economy to sustainable growth.

Economists are in sharp disagreement about how to resolve the crisis. Some want large immediate government spending and targeted tax cuts to stimulate the economy. Others prefer to let the market resolve the crisis. Leading economists including Nobel Prize winners are all over the map. Larry Summers, the president’s top economist, claims that a dollar in government stimulus will generate a dollar fifty in economic activity. Others claim little to no benefit. Others say the stimulus package needs to be much bigger than $825 billion. There is no consensus among economists on what to do and how much money is required. There is wide disagreement on how to get maximum bang from the remaining $350 billion in TARP funds and the $825 billion stimulus package that will be signed into law in February.

History has recorded that financial crises often take a long time to dissipate. A worldwide financial crisis in 1857 which occurred in the simpler global monetary system of the gold standard took seven months to resolve. Other crises lasted longer and some shorter. There is no “scientific” basis on which to forecast an end to the current crisis. The country needs a good dose of patience and prudence.

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