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February - 2009

Why is the stimulus needed?

Thursday early morning , February 26, 2009.

“Open the door! Please open the door! I’m starving. Give me some food!” An ant leant out of the window. “Who’s there? Who is it?” “It’s me - the cricket. I’m cold and hungry, with no roof over my head.” “The cricket? Ah, yes! I remember you. And what were you doing all summer while we were getting ready for winter?” “Me? I was singing and filling the whole earth and sky with my song!” “Singing, eh?” said the ant. “Well, try dancing now!”

by Aesop

I’ve been reading and hearing a lot lately the argument of why should ant-y folks without debts, who achieved this situation with hard work and sacrificed spending, help out the more cricket-y folks, who maxed their credit cards or took on mortgages that they couldn’t pay, to live beyond their means enjoying the good life?

We also hear about the moral hazard issue, specially with defaulting banks, and more generally Wall Street. Or, that we are sowing the seeds for a worse future outcome by bailing out the ones that should go under due to their mistakes… By sending out a dangerous message:  go on, be rash, don’t worry nor be cautious, we’ll bail you out, no matter what.

I’m sorry to have to say, to those honest-hard working-frugal folks: that the public’s responsibility is unavoidable.

Let’s imagine for a moment that there are no central banks. And, this was the situation in many countries not so far back as maybe the XIX century. If the economy dived for whatever reason, there was hell to pay by the public at large.

I hope the ant-y among us understand that, unfortunately, they will always have to help to put out the fire that started in the cricket-y neighborhood. If not, they face the risk that a wild fire will spread out of control, possibly engulfing their property and burning it down to ashes too.

Central banks were created to find ways to avoid these situations. We know they haven’t done a very good job, because now and then the economy falls into a tailspin anyhow —which, to be fair with central banks, is probably telling us that they can do so much, that they can only mitigate the problem to an extent, and that they do not have total control over the economy.

So, what am I saying? In essence, that the damage to society from an unbridled market is much larger than if you put the emergency squad pros —central banks— to try to direct the course of the waters of a deranged economy.

Consumer net worth has already dropped $7 trillion from their high point —this affects us all, not only the cricket-y folks.

I hope the ant-y among us understand that, unfortunately, they will always have to help to put out the fire that started in the cricket-y neighborhood. If not, they face the risk that a wild fire will spread out of control, possibly engulfing their property and burning it down to ashes too.

Is it fair? No, it’s not. But, by the same token, is it fair that some of us were born smarter than others? Probably not either. So, if you feel you’re one of the lucky ones, thank your blessings, and open up your compassion to the less fortunate —it’s not only the right thing to do, but the smartest.

On February 27, The New York Times published this article which further illustrates the economic entanglement we are living in.

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