Turning Back the Clock

Matt gets it exactly right:

A substantial swathe of policy elites, starting with Hank Paulson and Ben Bernanke and George Bush and now evidently including Timothy Geithner and Larry Summers and Barack Obama really do seem to think that saving the firms is the key. That the world as it existed in the years 1996 to 2006 represents some kind of ideal of economic activity, and that they job is to put humpty-dumpty back together again.

I, too, think this disastrous. If there’s one thing we should all agree on, it’s that the course we were on before the financial crisis hit was unsustainable. Now, unlike some Austrian School devotees who think that stimulus is completely counterproductive, my bigger fear is a deflationary spiral, so I understand the need and desire to send electricity through the system to beef up demand. But the end result has to be not a return to prosperity as we once knew it, with buoyant consumer spending being financed by inflows of investment from abroad, but rather something else. All this demand-boosting should be in order to facilitate a softer landing as we readjust our economy and figure out just what this something else is, not a means to turning back the clock.