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May 18th, 2009 at 12:42 am
Hey there jck!
I have something to share with you and then a follow up question. I was doing some blog reading and came across this link on nakedcapitalism: http://www.calculatedriskblog.com/2009/05/roubini-on-cnbc-yellow-weeds.html
In it, Roubini seems to subscibe to the Treasury view that Krugman, DeLong and others have so vehemently opposed throughout this crisis. Roubini says that trend growth and the recovery over the longer term will be significantly reduced in part because of the “crowding out” of the massive borrowing of the U.S. government. Roubini’s apparent subscription to the Treasury view (unless I am simply misunderstanding the Treasuy view, which is entirely possible) comes as a shock to me simply because the Krugmans and DeLongs have dogged everyone who has supported the Treasury view.
I am writing to you because you are really the only informed and prolific writer on this crisis that actually responds to your commenters’ inquiries. I was wondering if I am right about Roubini’s take on government spending, and if, in your opinion, the Treasury view is the correct take.
Thanks in advance!
May 18th, 2009 at 11:21 am
Well, when Roubini said: “…Large budget deficits will push out growth” he is de facto espousing the “Treasury view” and the “Treasury view” has long been discredited, so I am a bit surprised that he said that. ( too much partying…)
I would make the argument for lower growth based on the state of the banking system, going forwards banks will need higher capital ratios which can be achieved by altering the balance between high risk-weight assets in favor of 0 (govt bonds) or low risk-weight assets, this results in a kind of “crowding out” but it has nothing to do with fiscal deficits as it would happen even without them, the fiscal deficit just make it easier and faster to alter the assets mix.