Stimulus vs. Monetary Policy

Monetary policy stimulates the economy by determining the amount of money that is injected into the banking system each month. Fiscal stimulus is money spent directly by the federal government on various projects.

While The Bernanke Files is not totally anti-Stimulus, it has concluded that the current stabilization of the economy had little or nothing to do with Obama's stimulus plan. Several weeks ago, before the "popular" indicators showed economic stabilization, Liberal commentators said the stimulus plan hadn't yet worked because most of the stimulus plan has not been spent. Now, after the "popular" indicators are turning around, those same commentators are saying "See, we told you so! Of course the stimulus is working." In reality, though, ONLY $25 Billion more dollars has been spent since then!!! In a $14,000 Billion economy, of course $25 Billion will make virtually no difference.

There is other evidence that shows that stimulus has done little, much less than the efficiently crafted monetary policy has done. First, if stimulus was working, one would expect people to go out buy things like clothes, toys, toothbrushes, etc. But, as was reported this week, retail sales declined by MUCH MORE THAN ANTICIPATED. Clearly, to any unbiased spectator, one would have to be skeptical of saying the stimulus plan had much, if anything, to do with the turnaround.

Conversely, monetary policy is having a large impact. Econ101 says that stimulus plans work because it replaces the "fearful" investor/consumer spending with government spending. This time, though, the Fed has crafted such efficient monetary policy that interest rates are declining (A2/P2 is way down, the LIBOR-OIS spread is almost back to normal). This makes investors invest more because they can borrow money for less than what they will make off of the money. Investors in turn employee consumers who can then spend money. The Bernanke Files believes the first step, investors investing more, is beginning to take place. Next, down the road, unemployment will turn around because of investment, not the stimulus plan.