Wednesday, February 25, 2009

Obama's Gamble

. Wednesday, February 25, 2009

Tyler Cowen pulls out Occam’s Razor on Obama’s speech to Congress:

When you consider the speech as a whole, Obama is promising the largest attempt and most ambitious at rate of return arbitrage in the history of the human race.

Obama's speech was very effective but it is mostly about borrowing more money. It is odd that in a time when capital markets and attempted arbitrage have so failed us the solution is to resort to...capital markets and attempted arbitrage.


This is a gamble for Obama. His plans are ambitious, and perhaps the problems of today call for ambition. But Obama’s plans are contingent on the faith of foreign and domestic lenders in the U.S. government. Right now the government can borrow at very low rates of interest, and so Obama wants to borrow today in the hopes that when the bill comes due the yield on our investments will have made up the deficit. In a sense, Obama is placing an intertemporal carry trade bet with U.S. currency: he’s gambling that the dollars he borrows today will be more valuable than dollars he (or his successors) has to pay back later. It might pay off. It might not.

Or perhaps Obama is setting the government’s discount rate at some very high number. What theory is he operating under? If you view Obama as the head of a very large household, then perhaps he is trying to smooth out our national consumption. In other words, he’s playing a Keynesian game with Friedmanite justifications. Has this ever happened before?

Theoretically, Obama’s gamble doesn’t look much different to me from the Greenspan/Bush gamble following the bursting of the tech bubble. It’s being couched differently, but really he’s playing the same game. Didn't work so well the last time. I guess we'll have to hope for better results this go round.

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Obama's Gamble
 
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