It is the worst possible time for us to have a lame duck administration.  The contraction that is taking place has a lot of self re-enforcing loops.  People are getting laid off in droves – that scares everyone else – people stop spending – demand drops off – companies need to cut back – resulting in more layoffs.  Monetary policy is essentially useless for breaking this and similar loops that are taking place.  The cost and availability of funds are not at issue.  Narrow money supply has grown at an unprecedented rate.  But money that has been going to banks and to consumers (refund checks) has essentially wound up in savings accounts.

What could provide a real circuit breaker would be fiscal stimulus.  For instance, I would much prefer that instead of giving money to banks and consumers, the government should place a large order for electric cars with automakers (and not just GM, Chrysler and Ford, but also Tesla and other startups).  Similarly, the government could place a bunch of orders for cleantech (e.g. install solar cells on buildings).  It may not sound like government orders could amount to much, but that’s not the case at all.  GM’s quarterly revenue was $38B.  So a $15B federal car order over the course of 1 year would be a 10% revenue bump for GM!  Compared to what we have been plowing into AIG that is a small amount.

Dollars that flow into the economy through government purchases stimulate demand directly.  GM will purchase parts from suppliers.  Suppliers will pay their suppliers and employees.  Employees that receive a regular salary will spend some of that on consumption (unlike windfall tax rebate checks).  In addition to this direct effect, there is also the indirect psychological effect.  Seeing products being built as opposed to money disappearing down dark holes will make people feel good.  New cars are tangible.  Feeling good will make other companies and people get moving as well.

I sure wish we could simply have Obama sworn in tomorrow and get this show on the road before this becomes a death spiral for the economy.