Wednesday, July 31, 2013

Evan Soltas — How to Think About Malinvestment

Evan schools Larry Summers and Austrian economists about "malinvestment" in a recession owing to low interest rates. NOT.

Evan Soltas
How to Think About Malinvestment
(h/t Brad DeLong)


PeterP said...

I think it is Summers who is right, see my comment at Soltas blog. Summers supports fiscal policy.

Tom Hickey said...

PeterP, I agree with your comment there on fiscal. Bu the issue here is not monetary v.fiscal but whether a cb setting the interest rate "too low for too long" promotes malinvestment as a general rule.

I think that the cb setting the rate low to encourage investment in the economic sense (firm spending on capital goods) during downturn is unlikely to result in malinvestment in this sense. But it can result in leveraged speculation based on low borrowing cost driving up asset prices higher than they would be otherwise, which the Fed admitted was the intention of QE in order to increase the wealth effect as a spending channel to add to lagging demand, which would stimulate capital investment.

Of course, MMT argues that this is uncertain as a transmission mechanism, although the low mortgage rates did cushion the fall in housing prices. Fiscal is the way to go to increase lagging demand directly by addressing demand leakage to saving-deleveraging in the pullback after "irrational exuberance," and a lot of fraud to boot, created a bubble.