Rolf Englund IntCom internetional
"this paradox is absolutely vital to understanding macroeconomics"
The “paradox of thrift” was the most counterintuitive and, to the classically trained economist, morally, theoretically and practically objectionable idea in John Maynard Keynes’ General Theory of Employment, Interest and Money, published in 1936, in response to the Great Depression.
The Paradox of Deleveraging
Back in college, most of us took microeconomics before we took macroeconomics. In fact, at Grinnell College where I went, microeconomics was a prerequisite for macroeconomics.
For me, a simple concept brought this realisation: the paradox of thrift.
This principle is part of a whole range of macroeconomic concepts under the label of the paradox of aggregation:
Understanding this paradox is absolutely vital to understanding macroeconomics and even more so to understanding what is presently unfolding in global financial markets.
Yes, that $29 billion is actually a loan to a Limited Liability Corporation (LLC) set up to hold the Bear assets, with JP Morgan providing a $1 billion subordinated loan (sometimes called the “first loss” tranche) to the LLC. But that is merely a technical detail – the bottom line is that we the taxpayers bought $29 billion of Bear’s assets.
That’s not to suggest that there is no room for coordination between the monetary and fiscal authorities. This is particularly the case when the economy is experiencing asset deflation, begetting debt deflation and deleveraging. Indeed, none other than Chairman Bernanke made this case when he was Governor, first in November 2002 in his famous speech titled
The Fed has lost control of the money supply, because the banks it regulates no longer are the primary movers of debt creation.