The easy bet is stock prices would rise, but unfortunately just fixing the fiscal side of the economy may not be enough to reverse the downturn. Fiscal policy refers to government tax, spending and regulation policy. Monetary policy refers primarily to the actions of the Federal Reserve in controlling the growth of the money supply.
There is plenty of blame to go around for the current mess, notably:
- The Federal Reserve, whose initial mistakes set off the crisis.
- The Bush administration for failing to adequately control government spending.
- Congress for encouraging irresponsible lending by Fannie Mae and Freddie Mac, passing a series of destructive regulatory measures (including the Community Reinvestment Act, Sarbanes‐Oxley, etc.), and engaging in wasteful spending.
- And now, the Obama administration, which has already made a boatload of bad decisions, including the tax increase proposals mentioned above, an irresponsible and counterproductive “stimulus bill” — aptly referred to as “a dog’s breakfast” by the economic historian Niall Ferguson — the new “omnibus” spending bill, and a host of destructive trade and regulatory proposals.
Members of Congress continue to advocate counterproductive proposals, which will do great damage to the U.S. and world economy. For instance, Sens. Byron Dorgan and Carl Levin have proposed a couple of anti‐tax haven bills, which will actually drive more U.S. companies to foreign countries and diminish the amount of foreign investment in the U.S., just when the U.S. needs more investment to fund the additional debt. These senators are typical of those in Congress who seem incapable of understanding the second order effects of their actions, which is why we are in the current mess. (Note: The core problem was not greedy bankers — they suddenly did not become more greedy.)