President Barack Obama’s $825 billion stimulus package is too small to stop the economy’s downward spiral, according to Robert Shiller, an economics professor at Yale University and chief economist at MacroMarkets.
Although he doesn’t recommend a figure, Shiller says the stimulus must be “significantly greater” or the economy will continue to sink.
The government must also get more involved in lending. The Fed’s special loan facilities must be much larger; government institutions must lend more; and the government should keep failed banks alive longer as bridge banks under government supervision to keep credit flowing, he writes in an editorial in The Wall Street Journal.
The government has spent over $250 billion to recapitalize banks so far.
“But just making the banks solvent is not enough,” Shiller writes, adding that they won’t expanding lending just because they are more solvent. They need profits and less fear of failure.
“Now is not the time for the timid,” Shiller writes.
Even if passed quickly, the stimulus “fails to take into account the downward spiral of animal spirits that is under way and may continue to worsen,” Shiller writes.
It’s all about those “animal spirits,” a term coined by the economist John Maynard Keynes, explains Shiller, co-creator of the Case-Shiller Home Price Index.
More than just business confidence, animal spirits means the confidence and trust we have in others. Previously, that trust was unrealistically high. Investors stood by as supposed gurus rolled out complicated securitization and derivative products, setting the stage for the current disaster.
Now animal spirits are dismally low. Deep mistrust has replaced overconfidence, he says. Looking back on the past, we wonder how we could have been so fool hardy.
Even members of Congress aren’t certain the stimulus in the House today will be enough, Rep. Steny Hoyer (D-Md.) told the Baltimore Sun.
"I'm not sure," Hoyer told the newspaper. "And I think that's true of everybody."
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