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The peremptory cleansing effects of a recession seem most useful to the finance industry itself. Everywhere else, the requirement that one’s revenue consist of payments for *something* limits how uselessly unproductive a given company can be. Even if demand for pet rocks is inflated by cheap credit, or prices driven low by overinvestment in production, there are only so many pet rocks one person will want. Marginal demand eventually always reaches zero.

But money, there’s no limit to demand for money. Any number of elaborate Ponzi schemes fed with zero-interest lending can exist, and in fact the more the better because that makes it harder for the SEC to investigate. Zero rates mean you can promise quite ordinary returns - 5% say - which makes it much easier to string people along for years.

Of course this finance area also includes negative-profit startups. Generally those are a small part of the economy, though.

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A very interesting point… Thanks...

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Especially if crisis bailouts of institutions includes bailouts of investors and management, the huge political economy mistake of Geithner-Bernanke.

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In other words, we need recessions to clean out the financial sector, but they are harmful to the productive sector. The financial sector has no natural limits, while the productive sector does. This makes a lot of sense from a systems point of view. Productive markets can be saturated, financial markets cannot.

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I don't see any intrinsic reason that the Fed can't do stuff (e.g. create money) as fast as firms are trying to reduce costs. Central banks should be judged against perfection. Sure they will in fact make mistakes but full employment inflation and less than full employment deflation just should not happen.

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The Fed could make all the money it wants, but creating demand requires getting that money into the hands of people who will spend it. We need something like the Fed, but for creating demand.

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You'll probably call this cheating, bringing Keynes back in thought the side door after seeing him out the front, but, I agree, someone must decide to spend in response to the newly created credit, and who better, if private investors are skittish than States and the Federal government?

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Yes indeed!

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"Mr. Keynes and the Neo Classics" :)

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:-)

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I’m a fan of Jason’s, my guess is he’ll appreciate your well reasoned argument.

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author

Yes. Jason is lively, smart, and usually quite thoughtful...

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