November 17, 2008

Few Humble Thoughts about the Economy By Ben Stein

Posted: 12:51 PM ET

Few Humble Thoughts About The Economy

By Ben Stein, Larry King Live Blog Exclusive


We are clearly in a serious slowdown. A slowdown this serious, fed by a credit shutdown, will not stop automatically or at least might not.


This is way beyond a normal recession. At this point it might become self reinforcing and become like a Depression in which we reach what economists call a state of equilibrium far below full employment.


This is what happened in the great depression and could happen this time. The main contributor to this unusual situation is a serious credit shortage, generated by fears fed by the collapse of Lehman and the problems at other lenders such as Wachovia and Washington Mutual and financial firms such as Merrill Lynch and Bear Stearns.


There is no other entity besides the government that can restore this situation to a full employment equilibrium position. State governments are suffering and so are municipalities. Corporations are obviously suffering. Only the federal government can literally print money to restore the situation.


Any stimulus will have to be large and fast. The analogy would be to falling off a cliff. It takes a certain care to keep from falling off a cliff but it is a lot easier than retrieving you after you have fallen. The history is that only a large amount of stimulus at this point when the private economy is in shock will help. This means a lot of stimulus applied on a continuous basis.


The usual argument against this is that it will be inflationary. The fact is that history tells us that when the velocity of money has fallen as much as it has fallen, you can increase the volume of money by a vast amount and it still will not cause inflation until you get up to full employment again. Once that happens the fed can drain money from the system and control inflation.


There is no macro economic reason not to save the auto companies. They must be reformed, of course, but they need to be saved to keep a massive fall in employment and confidence from occurring.


In the current environment, that of credit fears, there are immense bargains out there in credit related issues such as real estate investment trusts and federally guaranteed mortgage real estate investment trusts and also in real estate itself.

Stocks look cheap but not if the economy falls into a true Depression.

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