The Bailout: Monetarism in Action

I wanted to make another note about the bailout package, and why Wall Street wants it so badly. The overriding principle behind the proposed bailout reflects Wall Street's blind belief in the economic theory of "monetarism." This theory calls for pumping money into the economy to make it better during bad times. There is a joke that explains monetarism refers to Ben Bernanke in a helicopter dropping bags of money to random people. Unfortunately, this joke falls into the "funny because it's true" category.

Richard Duncan, in Chapter 3 of his book, The Dollar Crisis: Causes, Consequences, Cures , Revised and Updated, says that monetarism is like pouring water over a drowning child. He states:

The failure of those [liquidity calibration] attempts will be the death of monetarism, which claims that any economic difficulty can be overcome simply by adjusting the money supply up or down depending on the circumstances. It will be death through drowning.

To continue the analogy, pouring money into a shallow pool to attract more people doesn't mean people will suddenly learn how to swim--some people will drown as the pool becomes more dangerous.

I am surprised more news stories haven't mentioned the term, "monetarism." The absence of the term in new stories shows either the mainstream media don't know much about economics, or they think their audience can't understand economic theory.

Comments

[PastTense:]

No, the reason Wall Street wants this so badly is that the government will pay substantially more for these toxic assets than their market value. It's just another government boondogle.

2008 Oct 01 03:51 PM

[phdinsuntan...:]

if your first love has always been economics
you know that there is nothing of monethary
theory in this game:
mv=pq,
more m, given v/q constant, means only more p,
we all know q is collapsing
because of (g - t) caused too much (m - x)
as m-x was funded by b*
now the foreign holders of b wants a lot more i
you can get domestic b with a low i
but as p will go to the moon,
your i/p will go to hell if you not fix
g - t = 0 with a very positive x-m.

2008 Oct 01 04:04 PM