With all due respect I believe that the logical fallacy that Drew is making is the same as those who propose tax cuts as a dominant form of stimulus. What usually catalyzes a free market need not work in times of extraordinary uncertainty. We must remember that stimulus packages are enacted at unique economics times; times when people (on aggregate) are not willing to spend, times when firms have bleak outlooks about future profits, and therefore are much less willing to make large investments, even if Drew does buy their stock, and times when banks regardless of how much money we put in them are either unwilling or unable to loan it back out to people willing to spend it. This last point is especially relevant to today. Despite massive excess reserves, banks are currently either unwilling or unable to make loans.
I think the graph I have just made makes this blatantly clear. The green line is required reserves held by banks; where as the blue line is the excess reserves, those not being loaned out. As you can see as the Federal Reserve has drastically increased the money supply, by nearly a trillion dollars, by injecting money directly into banks all that they have been able to accomplish is increasing banks reserves. No one is willing to lend, no one is willing to borrow, and no one is willing to spend. Therefore the government must step in and be the borrower and consumer of last resort.
Just to make this even more staggering, in the wake of 9/11 the Federal Reserve in pumped nearly $25 billion dollars into the banking system out of fear that financial markets might seize up. That increase is hardly distinguishable given the monetary injections of the past few months.
Cheers,
Phil
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