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In an interview on Consuelo Mack Wealthtrack (which we took notes on here), Paul McCulley likened Ben Bernanke to a “bartender at an Alcoholics Anonymous meeting.”Now at first blush, this statement might sound highly critical and moralistic, like saying that Bernanke is feeding the worst habits of the economy, when in reality the economy needs to be cut off from cheap leverage and go cold turkey.
And since elsewhere in his interview, McCulley slammed moralistic interpretations of macro-economics, this seems odd.
But here’s the full line from McCulley: “Suddenly the Federal Reserve is the bartender at an AA Meeting: You Keep cutting the price, but nobody’s drinking!”
So he actually wasn’t making a judgment, but rather just describing the reality of an economy that’s in deleveraging (or as put it, in a liquidity trap). When people want to have less debt, no amount of rate cutting will want them to take on more. When people are quitting alcohol, lowering the price doesn’t matter (or at least, it’s not the price that will make them change their mind.).
Unlike in past recessions, where households were sensitive to changes in the price of credit, in this economy they’re not, and Bernanke’s actions do very little.
So according to McCulley (who sounds very Richard Koo-like, when talking about all this) the answer is: Fiscal, fiscal, and more fiscal stimulus. Let the government lever up, so that the private sector can finishing levering down without an economic collapse.
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