One problem is that different people have different ideas on what mistake the US made in the depression. I agreement the monetarist/Keynesian view and disagree with the Austrian/Chicago views. Part of the reason for this is that the Austrians and Chicago schools don’t have a (at least to me) convincing explanation of how the world finally got out of the Great Depression through World War II. Also Chicago school and Washington Consensus formulas based on structural adjustment have tended to destroy developing economies.

It was easy to point to Mexico/Chile and argue for neo-liberal solutions in 1990, but after 1992, it becomes harder to do that.

Loo: Cutting interest rate in China will not work to boost consumption as the consumers credit market is very small. It will only aggravate the situation as it will boost production and create further over capacity.

1) If it’s small, then it can be expanded.

2) I think boosting production is a good thing. You deal with a demand shock not by decreasing production but by increasing demand.

And whether boosting production is good or bad depends on what is being boosted. If all of that credit goes to creating new steel plants, that’s probably not a good thing. If it is used to build more earthquake proof schools, that is a good thing. If the credit is used to prop up businesses that are not going to be profitable even in the best of times, this is bad. If credit is used to keep cyclical businesses going, and then to shut down old businesses and start new ones, this is a good thing.

A lot depends on how well the banks allocate credit, and if the government says you much loan $X billion, and the banks respond by loaning that $X billion in areas were they can make the most money and minimize losses, that’s a good thing.

The problem with responding by cutting production is that the equations never balance. As you cut production, you cut employment, as employment gets cut demand gets cut, and so you spiral to the bottom.

Finally, you hit political reality. The Chinese population will simply not tolerant a massive economic contraction, and if you try to impose a massive economic contraction on the public, they will overthrow you and find someone else with different policy, and the political disruption will cause more economic damage than just not contracting the economy. One thing that has helped the US greatly is the process for “overthrowing the government” (which is what happened) in the US is much more developed than in China.

All economic policies have bad consequences and risks, and I distrust economists that can’t point to the bad consequences and risks of their policies. One big risk is ‘the economy might not work the way I think it does.’

The relevant question right now is “should China choose between social stability and long term growth” because even if there is a trade off, there is no choice here. If your recommendation is “contract the economy” you will get fired and the government and public will look for someone else, because this is not an acceptable answer.

The relevant question is “what are the bad consequences of maintaining social stability and short term economic growth, and how can we reduce those bad consequences?”

I don’t think that this is the question. There have been numerous times historically where people have been asked to suffer short term for the long term good, and it turns out that they ended up suffering both short term and long term because the economic model that said that there was a trade off was wrong.

The political reality is that there are limits to which people are willing to suffer short term, and those limits need to be respected. So massive lending may and probably will lead to more NPL’s. At that point you just can’t give up, you then look at the problem to see what you can do to mitigate the problem.