OMG. Krugman still believes in secular stagnation.

I agree with Krugman 95% of the time, so I’m baffledas to why he’s fallen for, and is still paying lip service to Lawrence Summers’s secular stagnation nonsense.

In this recent New York Times article, and starting at the paragraph that begins “You may or may not have heard…”, he argues that we are short of viable investments to make, ergo investment spending is subdued, ergo aggregate demand is subdued, ergo “the result is a persistent slump” as he puts it.

Well the simple answer to that is that investment spending is not the only constituent of aggregate demand. It doesn’t even make up a big percentage of GDP for most countries. The average figure world-wide is roughly 20-25% of GDP.

So… if demand is inadequate due to subdued investment spending, why not  just channel new money into household pockets, then CONSUMPTOIN SPENDING will make up for the lost investment spending? Or if you’re on the political left, you’ll want to see more emphasis on public spending rather than household spending. Indeed, the latter cure for the problem is incorporated in postjust below.

As to the instabilities that derive from twits who make daft investments, we can’t stop rich idiots behaving like rich idiots. So some instability from that source may be inevitable. But at least we can ameliorate the instabilities that derive from idiots borrowing from banks to make idiot investments which then fail and bring banks down with them.

The way to do that was set out by Milton Friedman decades ago in his book “A Program for Monetary Stability”. And a system much the same as as Friedman’s is currently being advocated by LawrenceKotlikoff.

Essentially Friedman, Kotlikoff (and others) advocate having bank loans funded by ENTIRELY by bank shareholders or other types of loss absorbers. That means it’s impossible for banks to suddenly collapse, though the value of their shares will fall if they make silly loans. And that means they dwindle to nothing over a period of time, or they’re taken over.

As Mervyn King put it in his Bagehot to Basel speech,“we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis. Equity markets provide a natural safety valve…”.

But unfortunately as soon as anyone suggests capital requirement improvements for banks, bankers start muttering about economic growth being hit, and politicians and regulators believe every word that comes from bankers. And I don’t blame them. You can tell how honest, sincere and trustworthy bankers are from the fact that they’ve laundered tens of billions for drug cartels, stolen billions from customers in the UK under the PPI fiasco. And then there’s the $20bn that J.P.Morgan have been fined recently. Clearly J.P.Morgan are to be trusted. Oh: I forgot to mention NINJA mortgages and dodgy CDOs.

Yep: you can trust bankers.