Saturday, June 18, 2011


Ok folks - Keynes bashing has become a popular sport amongst commentators and the bloggers who have no clue what they are talking about.

They hear others say that the Fed and the Western economies are practicing Keynesian economics by dropping rates and incurring large government deficits and just parrot it.

Here is a mini-Keynes primer:

Keynes was in favour of active involvement by the government in the economy. He did not believe in an economy left to the vagaries of chance, speculators and big money.

He wanted Governments to actively intervene to BURST bubbles.

He believed that Government spending should go DOWN when things were good and then RISE when things were weak to smooth out the hills and valleys.

Government policy should be directed at high employment levels where ever possible.

OK lets see what happened:

1) We had total failures Bernanke and Greenspan and successive US Treasury Secretaries like Robert Rubin, Lawrence Summers and Henry Paulson who believed in the free market. They removed regulations (anti-Keynsian) and denied bubbles in the stock market and RE (both of which burst with catastrophic effects).

The laissez-faire market-knows-best philosophy is based on the theories of Milton_Friedman- the anti-Keynes. He did not believe in regulating or Government intervention at all.

He also espoused small Government, less spending and lower taxes. Margaret Thatcher, the PM of UK, was a strong believer in his theories. Well taxes were cut but spending was not.

2) When it hit the RE bubble in the US exploded and it hit the fan then everyone suddenly turned from free marketers to Keynesian interventionists!!

The Friedman philosophy would have you leave the speculators to go down and let the market fall. But this could not happen- why??

Because most of the assets that were collapsing -stocks and bonds as well as the big deposits in banks, the bank bonds, the banks stocks and the senior executives of the banks - were the very rich and well connected. And they brought out their big guns and convinced everyone to move all the banks liabilities to the tax-payers for the sake of economy!

This is NOT Keynesian.

The first thing that happens in many countries is the big bank deposits are guaranteed by government (not Keynesian) then Interest rates fall everywhere (Keynesian) .

Now if they were playing by the Keynes play-book they would incur deficits to spend out of the recession. Yup they did that in spades, except they hadn't dropped spending in the good times, so started off from a deficit position.

Now here is a major difference... Keynes said the Government should NOT support assets but spend on infrastructure instead, which will help productivity in the future and has a direct impact in the economy and employment.

The Governments did not do that.

The US bought non-performing paper from banks and hedge funds, then bought it's own debt - all in an attempt to bolster assets. It worked - the stock market doubled, commodities soared and Wall Street insiders made their biggest bonuses ever. The UK did the same as did most European countries.

However unemployment has remained high and housing is moribund, since it is still deflating from the bubble the idiot twins said didn't exist and it is linked to the US consumer which has not benefitted from this experiment of Bernanke's.

Canada did put some money into rather quickly thrown-together and often ill-thought out infrastructure projects -like earthquake-proofing a tiny foot- bridge over the Capliano river that no-one uses and which took months and many $$$$. China embarked on a major infrastructure program and fared the best.

However the Tories could not resist buying loans from banks and doubling the CMHC-monster.

All this would have Keynes rolling in his grave. Almost none of is Keynesian.

So now when someone starts to say that Keynesian economics have failed, you can slap them hard and direct them to the facts.