[jeffkrol]

Interesting take.. though this is the only part "I" liked..........

Matt Yglesias chides Mr Biden for this, noting that borrowing at the time was quite sensible:

[D]uring the Bush years, we had low inflation, low interest rates, and plenty of private investment. What would higher taxes have accomplished? There are lots of valid criticisms to be made of Bush-era fiscal policy. Low taxes could have gone to bolstering working class incomes, for example, rather than those at the high end. We could have made potentially useful domestic public investments rather than spending all that money in Iraq...But the idea that we should have relied more on taxes and less on borrowing doesn't hold much water.

but the author.. ooooh so close...........

Orthodoxy would suggest that during a typical economic expansion a normal economy shouldn't be running large government deficits (unless the public sector is borrowing to fund positive return public investments that are likely to pay for themselves)

but alas he fails...

Government borrowing competes with private borrowing, crowding out potential private investment

some have proven this to be false........

Another pivot is then possible, to the argument that crowding out in the 2000s was a good thing, because any additional private borrowing would simply have done more to inflate the housing bubble. That's probably right, though that's quite the bank shot route to sensible macroprudential policy; much better and more direct to simply tighten lending standards.

The aughts: Should we be grateful for the Bush deficits? | The Economist

The other argument one might make is that the Bush deficits were providing the world with an extremely valuable thing: safe assets. American Treasuries are a special asset in global finance, highly liquid and highly safe, and as the global financial system has become more reliant on secured loans the importance of safe assets has soared. America's short-lived dalliance with budget surpluses and falling debt was therefore quite disturbing, in this view, and renewed American borrowing quite the relief. Indeed, one could say that American surpluses, by raising the return to safe assets, sped up Wall Street's attempts to spin gold from dross in packaging rum housing loans into shiny AAA MBS. That's also very plausible, though again the better response probably would have been to tighten mortgage lending standards.

Oh well a lot there.. and in the comments..
As I say "It's not how much the Fed spends but what they spend it on"..............

After reading the article I rather felt the author is overthinking the issue.

The orthodoxy is correct imo, you should not be running government deficits in a boom since it removes and important damping component from the boom/bust cycle. We'd hear a lot less sniping at Keynes if governments followed his requirement to run surpluses during a boom.

The idea that deficits provided a source of safe assets is interesting in the same sense that finding your arm has gangrene is interesting.

The reason being I recall studies that found too much stability is a bad thing as it leads people to load up on overly risky investments. A bit of motion sickness is important to remind people that normally extra returns = extra risk.

Thus according to that view Bush and the Fed were dangerously asleep at the wheel lulled to slumber by the very policies that would soon cause a financial tsunami.

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bampbs Oct 16th, 18:48

How can you meaningfully separate the borrowing from how it was spent? The money was wasted, therefore the borrowing was bad. If it had gone into useful, domestic investment, the dynamics of the economy would have been different.

The housing disaster occurred because regulators did nothing to interfere with the foolishness and malfeasance, and politicians of both parties pushed it. Sane voices were rare and were ridiculed.