Thank you for being so forthright about this Mr. Knakal. It's rare to hear anyone question the validity of Keynesian theory, though a thorough reexamination is long overdue. GB

First of all, the stimulus prevented a depression that would have made Herbert Hoover blush. Secondly, banks are retaining much of the money and inhibiting the multipler. Thirdly, last week Alan Greenspan said that Reaganomics is pretty much BS, just as Bush senior said 30 years ago when he described the scheme as "voodoo economics". Maybe it is time for you to re-think your position on Keynes. He was no dummy. If the world had listened to his warning in the Economic Consequences of Peace written after WWI, we probably would never have heard of a man named Hitler.

We cannot afford to sustain two fruitless and unecessary wars abroad. We cannot afford to throw billions of dollars down a dark hole that produces no future benefit for America. Our military strategy is the equivelent of the Marginot Line, outdated, ineffective, and downright dangerous. We cannot bailout our Banking institutions and at the same time create an environment where it is unwise for them to lend, we cannot tolerate irrational and mean spirited gridlock in Washington, we cannot have our political parties conducting an all out war of lies and misrepresentation on each other when the country is in a crisis. It is difficult to see how government belt tightening can do anything but create more stagnation and possibly lead to deflation. Banks need to recognize their real losses and write down their toxic assets and put them into the market place and they need to do that now. Fiscal Responsibility also means spending what you have wisely and in areas that deliver real benefits that address the problem. Ideology does not solve problems, action does. Americas great resilency and strenght comes from its ability to find pragmatic solutions to its problems irrespective of whatever ideology the solutions represents.

The parallels between the US experience since 2005, including the use of Keynesian and Monetary policy to try to minimize the recession and the Japanese experience beginning in 1985 which led to the "Lost Decade" are too significant to be ignored. We are approaching the third year of our "Lost Decade" and if all predictions are true, we will not recover any time before 2014. It is time to let the value of all assets including real estate to drop to market clearing prices so that we can begin the next cycle now....

I agree with both of the above comments. I would also say that Keynesian economics teaches that in times of economic downturn deficit spending is needed to increase aggregate demand. However, once the pump is primed and the economy is functioning again, the deficits need to be repaid. In America we have never stopped priming the pump and we have "flooded" ourselves with debt.

I agree with both of the above comments. I would also say that Keynesian economics teaches that in times of economic downturn deficit spending is needed to increase aggregate demand. However, once the pump is primed and the economy is functioning again, the deficits need to be repaid. In America we have never stopped priming the pump and we have "flooded" ourselves with debt.

When does the "priming" stop and the "pumping" begin?

We need more government spending, not less. The government should be viewed at this time as Under Funded. Government is the only entity that can put the proper stimulus into the economy to start it moving in a postive direction. It is vital that government spend here at home and stop wasting its treasure and resources abroad. The private sector is not going to create jobs in adequate numbers to make a difference. Without a substantial devaluation of the dollar (counter productive) trade is not going to increase. Those who fear deficit spending and the national debt should fear deflation and stagnation far more. Stagnation of the kind brought on by drastic belt tightening will do nothing to create more revenue or more jobs, infact, such moves could backfire and plunge us into a protracted Depression of the first order. I fear that those who propose such steps have an overly simple view of the current situation and are under estimating the extent of the problem. As a generalization I would estimate that American Assets have lost at least 40% of their value. That is a big hit that we are all suffering from in one way or another. The Japanese experience should teach us to accept our losses and get busy rebuilding and soon. When your head is in the sand your a$$ is in the wind.

Finding that point is the art of macroeconomic policy and it is not easy. However, there is a difference between stimulating the economy and buying votes. One final point and I am through: The right wing is always talking about how inefficient the government is. Well that may be, but I would point out that Lehman and AIG were/are private enterprises. I would also point out that the government does not defraud itself. That is being done by private enterprise, criminal and otherwise. I quess my overall point is that it is time to move away from mythology and to start think about things as they really are.

Ah, the Keynesian escape clause - the stimulus wasn't large/fast enough. Of course, we'll ignore that the foremost Keynesian economist today, Paul Krugman, said that a $600 billion dollar stimulus would be more than sufficient (http://krugman.blogs.nytimes.com/2008/11/10/stimulus-math-wonkish/).
Now, after a $775 billion dollar stimulus, where are we? You've delayed the economic downturn and made a larger one that will last for generations.
Never mind though, you just keep chasing that rabbit down the hole and spend this country into oblivion. P.S. Jim N: Lehman and AIG don't exist in a vaccum. GB

@Jim N - Youre right, it helped stave off a depression. now re-read your history books and see that Keynes informed our administration early on in the great depression that the amount of stimulus they were inacting would be counter-productive to the stimulus keynesian economics espouses. yeah, you read that right, he said they did too much. and you know what, history shows they did since the second downleg was much worse. your later comment seems to recognize this, but its thrown away as we need to spend until its positive, which we dont. there is, somewhere, and aggregate amount which will either succeed or fail, and no one is able to figure that number out. @James M - what you should be saying is that we need to shift our spending from funding wars in which we produce nothing but spend like crazy and move that money back in to job creation at home. also, the banks are not holding our stimulus money. thats a pointless comment. they have access to a 0% discount rate at the fed window, a window which was never accessed before and has now become socially acceptable. they can borrow money for free and day trade it to create profits. the rest of your comments on banks are spot on though. they need to write down and take losses and move along as quickly as possible. what everyone here is seeming to miss is that the current multiplier effect of government spending is actually a fraction and not a multiplier. it has been said recently that the amount of govt spending that actually gets in to the economy is only 40% of the dollars spent. so much for trickle down when 60 cents is being picked off the top. that right there would be enough for keynes to come out saying to stop the stimulus.

and lastly, on the topic of deflation, welcome to august 2010 folks, we have already experienced deflation. look at the cpi numbers. deflation is alive and expected in the near term. this idea that deflation is bad for the economy is a joke. nothing could be better in the current environment IF the deflation is brought on by increased savings and deleveraging. consumers still spend a sh*t ton of money. they just need to spend less. and when 70% of gdp is based on that spending, if it drops of 5% then gdp will be only slightly negative and the world wont stop spinning along in space. we need a coordinated and relatively quick saving and deleveraging to get a slowed growth back on track. face it folks, until we create the next big market (clean energy?) and invest in education, we will have garbage 0-2% real growth in this country. we are a blue chip, not an ipo. and until we solve that long run problem, our growth will be as such.

There is no fashionista "revival of Keynesian economics" as implied in this article. Unfortunately, there is a return of conditions evidencing the classic Keynesian liquidity trap. I was a monetrarist in the '70s and '80s, and supported Laffer-like tax policies, too. But I believe the current debate takes "science" out of the argument, and leaves only the "dismal" part. Said another way, the study of political economy has become mostly politics, mostly from folks who want to receive services and pay less tax. If we can't allow our thinking to match business conditions, and go thru a bout of deficit tightening, we doom ouorselves to the Japanese-style lost decade(s) or worse (ref: WWI follows Hooverville). Politics controls all now, left & right, just look at the absurd financial "reform" that leaves moribund banks bigger than ever.

This liquidity trap is, to borrow the phrase, nothing more than a broken banking system. Deflation is supposedly a good thing when everyone fears inflation, but some are expecting ultra-deflationary conditions like those seen in The Great Depression. This is beyond contrarian doomsaying. This is the unfortunate result of government intervention making a bad situation worse.

Simple question for those who believe in the Keynes multiplier effect: If the multiplier effect is real, then why shouldn't the government seize all wealth? Wouldn't that make us all more wealthy and keep GDP growing??

Whether or not stimulus prevented a depression that would have made Hoover blush is not debatable. Impossible to prove the absence of an event.There were many actions the Fed and Treasury could have enacted that would not have cost the Us taxpayer $800 billion. What is apparent is that the unemployment rate, M1, consumer confidence, housing prices, retail sales and many other indices are sliding. Tax cuts for the middle class and small business together with budget cost reduction and sunshine laws for all agencies of the federal goverment that were established since January 2009 is the ticket. These policies would make Regan smile because they WORK!!!

Joshua B. With all due respect, I have to wonder where your historical facts came from. By the way, from an economic perspective WWII was simply massive government spending. Please see below: April 2 (Bloomberg) -- When John Maynard Keynes came to Washington in 1934 to persuade President Franklin Roosevelt to spend more to revive the U.S. economy, Roosevelt didn't pay the British economist much attention, Thomas Worsley recalls. He hopes President Barack Obama won't repeat Roosevelt's mistake. Worsley, then a 23-year-old economist about to take a job in the Treasury Department, says Roosevelt balked at too much economic stimulus, and even allowed conservative Democrats to talk him into reining in federal outlays in 1937. Now, at 97, Worsley is watching as Obama wrestles with the deepest economic slump since the Great Depression and is coming under fire from critics at home and abroad over his spending plans. Ultimately, Worsley said, only World War II delivered the U.S. from its hard economic times, and he advises Obama to keep pumping money into the economy.

No one in this great right wing blog has commented on Greenspan's pronouncement last week that tax cuts do not bring in more tax revenue than they give up. Isn't this much like the Pope becoming a Hindu? Doesn't it make you think, just a little? Could Rush Limbaugh be wrong?

Alan Greenspan does what's expedient - not what economic principles demand. It's more like the Pope reaffirming the Nicene Creed. He was, after all, the one to keep interest rates at historic lows - thereby initiating an ill-advisable credit expansion. "No one in this great right wing blog. . ." Really? Is it really so predictable that every time the commonly accepted drivel is challenged that it must have come from a right-wing charicature? Disagreeing with the neo-Keynesian machine doesn't mean you're right wing - it could just mean you've found rational grounds to doubt it. Lastly, it is not proven that WWII was what ended the Great Depression - this merely relies on the fallacious "Broken Window Fallacy" that is treated like gospel in mosty economic circles. I would argue (taking a page from Vox Day) that America's position as one of the few countries with an intact infrastructure after WWII allowed us to capitalize on the voracious markets of recovering countries. Now that equilibrium has been restored, however, this may soon change.

I yield.

We are saddling ourselves the same way we saddled developing nations with too much debt drinking our own Koolaid.

Bob, as usual, spot on target and thought provoking. It has been empirically proven over the past 40 or so years that small businesses have been the catalyst for job creation. The banks are not lending to or for small business start-ups...too much risk, not proven, not enough collateral etc etc. Small businesses are started/funded with equity. Equity is after tax dollars. Its simple, less taxes = more equity for small business start-ups or expansion = more jobs = more certainty = more spending power = recovery = economic expansion & prosperity.
Nice to see Jim N yield: wish I had a rich uncle to who I could cry uncle!

Bob, as usual, spot on target and thought provoking. It has been empirically proven over the past 40 or so years that small businesses have been the catalyst for job creation. The banks are not lending to or for small business start-ups...too much risk, not proven, not enough collateral etc etc. Small businesses are started/funded with equity. Equity is after tax dollars. Its simple, less taxes = more equity for small business start-ups or expansion = more jobs = more certainty = more spending power = recovery = economic expansion & prosperity.
Nice to see Jim N yield: wish I had a rich uncle to who I could cry uncle!

I yield to the power of mythology. It overwhelms rational thought.

Robert Thanks for taking on this sensitive subject. judging by the number of responses you really hit a nerve. While much of what you wrote resonates with me, I can't help but think that we have entered a new era of globalism which renders the concepts of government fiscal policy ineffective unless they are implemented globally. That, of course, is not possible. Surprisingly, our GDP numbers show that many U.S. companies are doing well, except that they are doing well becasue most of their growth and investment is taking place in markets like China. On our own soil, these same companies are shrinking in terms of sales, employment and output. Obama Motors is a good example. The company staffed up its plants in China to build cars for the Chinese consumer market which is burgeoning with demand. Soon, the Chinese middle class will approximate the size of our entire population. The same may happen in India and in other high growth countries. In the process, the concept of a Super Power is being redefined in economic terms. It's no longer guns and military might; just purchasing power. Capital investment will flow freely to serve demand. Borrowing money to create demand under the new world order is unsustainable; and we all know that when something is unsustainable, it tends to stop.

It is apparent that the money supply has shrunk. Assets are worth less. Ipso facto cash in the bank accounts of individuals and small business = spending. More spending =more jobs. More jobs = recovery stabilization.
The Goverment jobs that are created by spending tax dollars via stimulus are permanent and include pension and medical obligations thus burdening we the people. These jobs ultimately req

It is apparent that the money supply has shrunk. Assets are worth less. Ipso facto cash in the bank accounts of individuals and small business = spending. More spending =more jobs. More jobs = recovery stabilization.
The Goverment jobs that are created by spending tax dollars via stimulus are permanent and include pension and medical obligations thus burdening we the people. These jobs ultimately req

It is apparent that the money supply has shrunk. Assets are worth less. Ipso facto cash in the bank accounts of individuals and small business = spending. More spending =more jobs. More jobs = recovery stabilization.
The Goverment jobs that are created by spending tax dollars via stimulus are permanent and include pension and medical obligations thus burdening we the people. These jobs ultimately req

If Keynesian economics is coupled with inflated projections regarding the issued debt's impact, it does little good. It's one thing to pump money into the system with altruism and no waste, it's obviously been another lately. It's also one thing when the world uses our currency as the international standard and oil is traded in dollars. However, if we get to the point where US credit becomes suspect due to our overwhelming debt and this were to change, we are in a lot of trouble as not only can we not only print money the same way, but our debts would most likely be called. And like Bob has stated in previous articles, if this stimulus does not reflect in increased employment and consumption, CRE will not benifit. Does the government need fair regulations, so the a crisis like suprime one won't happen again, sure. Do they need to get off the throat of business? Yes. Like Bob, mentioned ...ushering in an era of certainty. But as of right now, it is just throwing more ineffective money at the problem while tightening its grip on everyone to move about freely. Comparing us to India isn't fair....their gov is comprised of engineers and ours of lawyers.

Here's how we bring jobs back to the US: Repeal OSHA. Repeal all envirnomental laws. Repeal minimum wage laws.
Outlaw labor unions. Repeal all consumer protection laws. Repeal laws dealing with adulterated food, drugs, and other products. In other words, become China. Simple, no?

Chris - Interesting observation about the global market. However, the GDP growth we've had has been steadily adjusted downward, and it hasn't been real growth. The GDP equation considers government spending to be growth - this means that the wasteful stimilus programs enacted under the Bush and Obama administrations were actually considered to be positive growth. This has been what Robert Knakal has been pointing out since last year. Jim N - Though a reduction in government intervention would encourage growth, becoming China wouldn't be that far of a jump. China itself is in the middle of a massive Real Estate bubble. They're building where there's no market and the state simply pumps more money into the broken pipeline. If you want to see human ingenuity take charge, tell Uncle Sam to step back.

Chris, It doesn't matter where the money comes from, too much money, from any source, flooding any market will inflate prices. The recent housing/CRE bubble in America was not caused by the government, it was caused by private capital gushing into an area that it thought it could acheive a high rate of return. China is now taking the money we have sent them for their manufactured goods and creating their own bubbles, which, when they burst, will make ours look like small potatoes. Read Extarordinary Popular Delusions and the Madness of Crowds written in the 1840's. It is a very intesting study of fads, bubbles and financial panics up to that time. Nothing changes. I really think that "government intervention" is vastly overblown as an inhibitor of economic growth, and I also think that a few points either way in marginal income taxes rates is largley unimportant in job creation. Do you seriously believe Gates would not have started Microsoft if high end tax rates would have been three points higher? We have important economic and demographic problems in America and I think all the time spent arguing over marginal tax rates is wasted effort. Great for talk shows and politcal campaigns, but taxes up or down a few points is not going to do much to solve our long term problems.

"The recent housing/CRE bubble in America was not caused by the government, it was caused by private capital gushing into an area that it thought it could acheive a high rate of return." Who enabled, encouraged, and (in some cases) mandated that high-risk loans be made to unfit borrowers? Who was it that allowed high risk loans to be securitized and insured by FNMA? Who allowed state income loans? "I really think that 'government intervention' is vastly overblown as an inhibitor of economic growth, and I also think that a few points either way in marginal income taxes rates is largley unimportant in job creation." Interesting. Care to share any facts to back that up, or are we simply running on what you think about the situation? "Do you seriously believe Gates would not have started Microsoft if high end tax rates would have been three points higher?" I believe it's been established that it's small business that drives an economy. Not just one small business, by the way. ". . .but taxes up or down a few points is not going to do much to solve our long term problems." I'm waiting for the metrics you've consulted to come to this conclusion. Sorry to be trolling your blog like this, Robert.

Good Lord! Barney Frank did it! I quess he caused caused the bubble in CRE too. Bad car loans? Nancy Pelosi, I suppose. Countrywide was just out to help the poor into McMansions. Doing the Lord's work so to speak. More talk show mythology. Our problems extend far beyond the marginal income tax rate. We are facing a surge in baby boomers who are going to try to (and eventually will have to) retire and many have no savings. We do not have anywhere enough doctors and other health care workers to care for the aging population. One in eigth of the elderly will develop Alzheimers. How will we care for them? Should we just left them wander the streets? Our roads and other infrastructure are crumbling before our eyes. We are flat broke, yet we are fighting two wars that seem to have no end. Our public school system is failing. Diabetis alone will bankrupt Medicare. We are a nation where 1/3 of all adults are obese. Children have high blood pressure and high cholesterol. Deflation is the greatest risk to the economy, and we don't have any tools to fight that. Metrics? I think so. Yes, my friend, we have problems that tinkering with the tax rates will do nothing to fix. We need some fresh ideas and not more verses of right or left wing dogma. Maybe were are just flat out of ideas and dogma is all we have left. All we need to do is act like "momma grizzlies" and every thing will be fine. I hope so.

Hmm, maybe someday pithy anecdotes won't pass for a rational argument, but that's certainly not this day. Saying that all your opponent has is "talk show mythology" and then spouting facts that are tangential to the actual discussion is NOT a coherent, logical argument, Jim. Why don't you put that straw man you're punching aside and address the situation. Nowhere did I say that changing a tax rate would solve all our problems. You've characterized me that way, either as a weak polemic or because you can't get the image of Rush Limbaugh out of your mind as you talk to me. Who mentioned Barney Frank? This mess was a bipartisan effort. Try and dissociate my disagreement with government interventionism with whatever pent up animosity you have toward the politcal "right." If I had walked into a loan originator's office and asked for a loan, asked that they ignore my questionable credit, and that they simply accept whatever I say my income is, they'd have laughed in my face. Enter political programs and voila! The blame does not solely rest with the government, but as my father always said, "Loose money makes thieves." Please Jim, put aside your favorite straw man arguments and address me like an adult.

Gabriel, Sorry if I have misjudged you. My words have been directed toward prevailing right wing ideology, which on this blog is the prevalent line of thought. My reference to Barney Frank was to illustrate that the hard right finds a way to blame the federal government for everything (The Communit Reinvestment Act). Private enteprrise good, government bad. Conservative good, liberal bad. Talk radio is a major force in America, and in my mind a very destructive force. I would still argue that political programs did not cause the housing bubble. I refer you to the latest minutes released from the Fed meting in 2005 (I think that was the year) in which several of the members noted a housing bubble was growing, and questioned the easy money policy they were employing. Specific mention was made of condo flipping. My point is that we have huge problems in America, and we need some new ideas to deal with them. As an example, Alan Greenspan recently refuted the idea that tax cuts pay for themselves. That statement calls into question the very basis of the Republican economic policy. Maybe Keynes was wrong too. We all need to look ourselves in the mirror and ask "could I be wrong"? Unfortunately, our politicans have their RNC/DNC issued bullet points, and that is all they have. PS Your father was right!

Perhaps those new ideas will come. I certainly hope so.

I believe it would be beneficial to do a column on the impending deflationary environment many analysts are predicting for 2011 and how it impacts commercial real estate.