Keynesian View: Someone speaks up

As you know, I like to post alternate viewpoints on this blog. This following is from a reader and fan. I much appreciate the input. I will not be posting counters this time, I'm just going to let this one stand.

Please note that this is way different than what I think personally. I don't have time today to speak to it.

Dear Shawn,

I am in the UK (yet I lived in the states for six years) and studying economics, specifically market failure and inflation. Looking back on Ron Paul and the media's reaction to the FED, I can only say (in the most unbiased way possible) that you are only hearing one side of the story, and a lot of it is, I daresay, irrelevant and to an extent untrue. To make my point I will start by giving you an overview of economic history since WW2; Keynesian policies were just adopted as they have shown themselves as the solution to market failure, in other words a recession. Those policies state that the government has to create jobs and cannot under any circumstances leave the market in the hands of the private sector ( which is what classical economists thought was the way to go, and this led to the Great Deppression).

To create jobs, a central bank would fuel the economy with money relative to the inflation rates. Now you may think that inflation is a bad thing, but that is not necessarily the case. You see, inflation is the amount of money for a good. An expanding economy has more and more goods, and therefore more and more money has to be printed (in a way, it is a sign of an expanding economy). But the big businesses did not like this policy as it meant that banks had less power than before, and so monetarism took over in the 70s, and acted as a balance between classical economics and Keynesian economics. Monetarism is very similar to classical economics (which remember brought the Great Depression), yet insisted on stable inflation rates to keep up with the expanding economy, which is a Keynesian idea.

So everything worked fine, until the housing bubble burst and banks went down the drain. Without loans, businesses started to fail. The private sector just failed. A monetarist in this scenario would say the fed should continue printing regularly and not do anything, and if this would have happened we would be in a much bigger mess. You see, a Keynesian would say the government should increase spending to revitalize banks, who will invest once again, and get the economy back up.

National Debt at this point is completely irrelevant, because the government's role is to support the people, and not itself. By bringing the economy back by spending more than they have, they are securing the country's future, as once it is back to normal the debts can be paid off. This is where I think Ron paul got it wrong; you see printing money is actually helping the economy as it encourages banks to invest once again. And the argument that Keynesian policies brought the country into the deficit is completely invalid, as it is currently bringing the country out of the deficit.

So you could blame it on monetarist ideals and the private sector, since they would have let the economy simply die. I think Obama's administration should spend money to help instead of watching the economy drown any day. I am not saying Ron Paul should not be trusted, but before you decide which side to root for, take a look at the true, unbiased, whole story. To do that, I would avoid Fox news...

Thanks for bearing with, and can't wait for more Batreps!!

J.

And while we're taking a walk on the wild side, let's hear from Rachel Maddow