Boom Bust Trap, Financial Meltdown on Horizon?

Boom Bust Trap -- 

Another financial meltdown on the horizon? | TheHill: "And you thought that last global financial crisis was bad. A report issued on Sunday by the Bank for International Settlements (BIS) warns that policymakers have failed to address the root problems that caused the 2007-2008 financial meltdown. Instead of taking a long-term perspective aimed at increasing real economic productivity and output — the kind that actually benefits people by raising living standards — government officials have sought to pump up the numbers through monetary and fiscal stimulus. As a result, we now have an alarming disconnect between the performance of global equity markets, which are booming, and an underlying world economy that is merely limping along. While major stock exchanges around the world have experienced spectacular returns — Standard & Poor's 500 Index went up 30 percent last year — real-world economic growth came in at a meager 3 percent for the first quarter of 2014... When the BIS chastises policymakers for masking structural deficiencies and long-run misallocations of economic resources by resorting to the quick monetary fixes of quantitative easing and zero-interest rates — well, it should get their attention. And when the report suggests that short-term policy responses to the last crisis may be "creating a bigger one down the road," the red lights should start flashing...." (read more at link above)

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Yes Fiscal Policy Matters, but What Kind of Stimulus?

"The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence. As I have described this evening, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process."--Christina D. Romer, November 7, 2011

Fiscal stimulus, yes, but of what kind?  Federal spending that is wasteful and encourages an increasing dependency on the federal government by state and local governments, as well as individuals? Tax cuts at a time when the continuing federal deficits are threatening the long-term future of the nation? Federal spending whose objective is to create more public union jobs (federal, state, or local) when we can't afford the public union jobs we already have?

The hard truth is the only stimulus we can afford is investment in infrastructure.*  This is federal spending with a real return--in terms of economic returns, increase in employment (mostly private employment--both union and non-union jobs), can be prioritized and allocated, and doesn't lead to long-term dependency on the "federal dole."

*Warren Buffett: “in terms of stimulus, infrastructure is a very, very logical place to spend real money. I mean, if you decide you're going to run a government deficit and large one and to act as a stimulus and you've got the kind of needs we have in this country in terms of all kinds of infrastructure...” (CNBC interview, Nov. 14, 2011)

Washington, are you listening?

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