Law on Rice

I’m reading for my financial institutions class tonight. My professor has written an interesting piece on the Great Depression and Milton Keynes’ theory. I was a frustrated economics major for a while there in college, so I found all this very interesting. I also found that my best recollection of Keynesian policy was a bit naive. I simply thought Keynes told us that the government should “spend big” to prevent depression.

But in reading the theory a little more closely, Keynes said there must be a liquidity trap before the government goes on a spending binge. That is, consumers have to stop spending and start hoarding money such that no matter how much money the Fed pumps into the system nothing happens. It seems to me we are very close to that liquidity trap today (even though consumer spending was up just a breath last quarter). The Keynesian policy, as it is being explained to me now, means that the government should step in to do what consumers are not doing: spend. It should restore the normal spending cycle.

I think the liquidity trap here, kind of like the Great Depression, comes from the fact that consumers were so highly leveraged that now they are little repulsed by it all. But I think there is a difference too: I think the lenders are repulsed (perhaps because of the government’s action) at their lending practices and are keeping money out of the system because of their reluctance.

But does this mean that the government could help the problem by not only spending, but guaranteeing private loans? That wouldn’t be all that popular days, I know! But it would help with the “where’s my bailout” sentiment floating around out there.

My apologies to you if this is a really amateur exposition of the situation, but I though it was interesting enough to write up.

By the way, you can find the original book on, of all things, Marxists.org here.