Monday, 9 February 2009

Why Bailouts - Neither Here nor Over There - Won't Work

The following snippet was copied and pasted from Dimensional Fund Advisors website. (My business is a committed and, for our size, a big user of DFA passive funds).
Jan 28, 2009Essays
Bailouts and Stimulus Plans - Addendum 1/28/09
by EUGENE F. FAMA
In his NY Times blog
Paul Krugman attacks my piece on the stimulus plan.
Again, here is my argument in three sentences.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
[Eugene F Fama is a financial economist and renowned for his work on efficient investment]

6 comments:

Mark Wadsworth said...

Brilliant.

"nor" not "of", BTW.

Lola said...

MW - Thanks for correction - (I was still editing post!) - now changed.

Oldrightie said...

The Political elite have not a clue what's going on. Billions of illegal funds need a home away from prying eyes. The derivitives scams were/are that home. Thus loss of control. Banks left with worthless junk bonds, baddies with mountains of cash. The rest of the world buggered!

The Economic Voice said...

I will only consider the bail out to be a success if a large proportion of the dosh somehow ends up safely in my hands!

AntiCitizenOne said...

TEV,

Write yourself a large check from your own account!

Stimulating and just as effective.

Lola said...

If self employed, tell HMRC that you've paid your income tax to yourlself this year hence cutting out the middleman. Furthermore your asset allocation decisions are better than the states, so you will make better use of the money than they will. And whilst your on the phone ask the apparatchik whether he's paid any income tax this year?