Thursday, January 29, 2009

Financial Transactions, Trust and Keynesian "Animal Spirits"

I read an interesting article by Shiller on how to facilitate credit markets' recovery:

In a nutshell, the theme: increase government support for the credit markets and also increase the size of the stimulus.

While Stiglitz's article on the Bretton Woods moment may make you consider whether time is circular, Shiller's article suggests trust is an absolute for any economic system to continue humming as usual, and then suggests targeting that same absolute for rebuilding a specific, battered, economic system.

In my previous blog below,

I referenced an Op Ed on a terrorist attack that wrapped up with "Stimulus doesn't have to be just economic". The theme in this Op Ed article was that it takes more than just funds to restore the spirit of an economic engine.

Looking from this lens, could Schiller's suggestion of expanded government stimuli be a case of prescribing Aspirin for headaches and heart attacks? Is Apirin really a miracle cure? If not, what are the alternatives? Is there no alternative?

Could expanded government stimuli really be a "necessary" condition for other factors to initiate an economic recovery?

What do you think?

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