Keynes & Balakrishnan

Though there are clearly many incongruencies between the depressed economy of which Keynes was speaking in Essays in Persuasion and today’s slumping economy, Keynes’ assertion that the micro-level actions of firms and individuals in the market (i.e. saving too much) can lead to macro and aggregate outcomes that are suboptimal is very pertinent to today’s financial woes. However, even though Keynesian economics is generally all about stimulating the G (in the every-so-famous macro model, Y = C (Y-T) + I + G +(X-M)), I think he would think twice before making the assertion that “no one can take the first step except the central banking authorities of the chief creditor countries” in the current market (146).

First of all, Keynes was not supportive of the government investing in infrastructure while running a deficit; and secondly, the main reason he turned to the Central Bank was because he hoped for the institution to restore confidence. In that sense, perhaps he would approve of the Fed’s decision not to lower the fed funds rate. As Andrews states in the NYT article, “Policy Makers Keep Key Rate Steady” (9/16 – same one everyone has been citing), “Some economists said the decision on rates also reflected the unhappy truth that a cut in the overnight federal funds rate might have merely highlighted the Fed’s limited ability to solve a problem that entails the entire housing and mortgage markets.” The Fed is trying to retain consumer confidence, without which, the institution would lose significant power.

Thus, even Keynes may question the Fed’s “New Role” (9/17 NYT article title) in bailing out AIG with an $85mil loan, though the bailouts of FM&FM and now AIG makes one consider the possibility that, as Balakrishnan writes in The Hindu Business Line, “Keynesian economics could soon be back on the table.” [Yes, The Hindu Business Line is my #1 source for all that is important.]