Spending More Than $800 Billion Is the Easy Part

Last night, on ABC News, Paul Krugman and George Will were interviewed, discussing the idea of whether the Stimulus Package is large enough, or too large. George Will quoted Secretary of the Treasury Mongenthau, FDR's Secretary, to the effect that all the stimulating did not lift the economy. Yes, 70 years ago.

“There’s a real danger in looking at Japan, or even our own experience during the 1930s, for what works or doesn’t work,” said Jeffrey E. Garten, a professor at the Yale School of Management who helped develop the Clinton administration’s economic strategies for Asia.

Does analyzing what happened 20 years, or 70 years, ago help?

“Those problems arose at a different moment in the history of the global economy, when banks around the world were not so intertwined and when the financial sector wasn’t so critical to global growth,” Mr. Garten said. Japan’s troubles, he said, barely affected international trade.

“The challenge is a political one: with the government putting a lot of funds into the banking system, Congress wants to see results, tangible results,” said Laurence H. Meyer, who served on the Federal Reserve from 1996 to 2002 and is vice chairman of Macroeconomic Advisers.

“But you don’t want the government in the position of deciding on loans,” he said, “because they are not going to be any better at that than the private sector was last year.” Moreover, once the government is involved in the decision there will be enormous pressure to lend to borrowers who might not be creditworthy, perpetuating the problem that triggered the problem.

“The fact is,” Mr. Meyer said, “there are a lot fewer creditworthy borrowers now than there were a year ago,” thanks to job losses and the erosion of assets.

Mr. Meyer and other economists, however, say they are encouraged by the Obama administration’s exploration of ways to draw private investors back into the market for “toxic assets.” If the price of those assets drops low enough, and the government is willing to guarantee investors against losses, “I think there is a lot of money on the sidelines that may come in to buy these up,” Mr. Meyer said. “There’s a great profit opportunity here.”