Tuesday, September 20, 2011
A Little Basic Economics Would Go a Long Way for Paul Kasriel and Joe Nocera
Nocera has a wide-eyed piece in this morning’s New York Times that touts a presentation by Paul Kasriel, an economist with Northern Trust. Kasriel has convinced Nocera (with “the force of revelation”) that there is a single economic problem hobbling us, unwillingness of banks to supply credit, and a single solution, more (and more and more) bond purchases by the Fed.
It’s painful to say this, but Kasriel seems to not understand that a reduction in lending could be driven either by shortage of demand or shortage of supply (or both). He simply assumes it comes from the supply side. With nonfinancial corporations sitting on something like $2 trillion in liquid reserves, could it just possibly be the case that demand is deficient? An oversight as fundamental as this is not just a random blip; it is the result of not thinking through the economic logic of a supposed argument.
I could burrow down into some of the details (yes, there is a credit constraint on small business, but this represents an intensification of a long-running problem in our dual economy; no, the collapsed ratio of credit creation to monetary base is not due to so much less of the numerator but so much more of the denominator, the old “pushing on a string”), but I’ll save your time and mine.