The Price of Inaction

BERKELEY – Are the world’s governments capable of keeping the world economy out of a deep and long depression? Three months ago, I would have said yes, without question. Now, I am not so certain.

The problem is not that governments are unsure about what to do. The standard checklist of what to do in a financial crisis to avoid a deep and prolonged depression has been gradually worked out over two centuries: by Bank of England Governor Cornelius Buller in 1825; by the Victorian-era editor of The Economist , Walter Bagehot; and by the economists Irving Fisher, John Maynard Keynes, Milton Friedman, among many others.

The key problem in times like these is that investor demand for safe, secure, and liquid assets – and thus their value – is too high, while demand for assets that underpin and finance the economy’s productive capital is too low. The obvious solution is for governments to create more cash to satisfy the demand for safe, secure, liquid assets.

As Keynes liked to say: “Unemployment develops...because people want the moon” – safe, secure, and liquid assets. “Men cannot be employed when the object of desire [i.e., money] is something which cannot be produced and the demand for which cannot readily be choked off.” The solution is “to persuade the public that green cheese [i.e., the notes printed by the central bank] is practically the same thing and to have a green cheese factory [i.e. a central bank] under public control...”