There are those, like former U.S. Rep. Ron Paul of Texas, who have pointed to their brand of fiscal conservativism and contended that “we are all Austrians now.” It’s a tip of the hat to the school of economics that is more in line with his thinking than the followers of John Maynard Keynes.
Keynes argued, among other things, that in the short run a depressed economy can be stimulated by an infusion of capital by a central bank and/or complementing actions by a central government.
This can be seen in practice in the Federal Reserve’s decision last week to spend billions buying bonds in order to keep interests rates low, which makes borrowing money more attractive and, in this time of lackluster economic growth, helps to spur investment.
However, the Keynesian express seemed about to end as word spread before last week that the Fed would begin to slow its buying. Hearing this, jittery investors on Wall Street began to sell off their holdings, which threatened to depress stock prices and slow (if not halt) the economic recovery. Coupled with uneasiness over the possibility that Congress will not raise the debt ceiling and the country might not be able to pay its bills, forecasts of doom and gloom were going round.
U.S. Stock Exchange investors had been particular nervous, so when the Fed announced that it had met with central bankers who promised to continue loaning if the government would continue to buy bonds, the stock market responded just as Keynes said it would.
Investors invested and the Dow Jones Industrial Average set a new record last week. Some of that gain was erased the next day, as investors cashed in their gains, but for the moment at least the Keynesian approach seemed to work as predicted.
Add to this the unexpected rise in the sale of previously owned homes and the arrival of lower-than-expected unemployment reports and it was a pretty heady time on Wall Street.
No one expects the Fed to continue to buy bonds at this rate, but the Keynesian approach has given the economy a boost as well as a little more time to recover.
That was what Keynes predicted in the first place.