Academic journal article ABA Banking Journal

Needed: Confidence, Not Short-Term Incentives

Academic journal article ABA Banking Journal

Needed: Confidence, Not Short-Term Incentives

Article excerpt

WHEN I WAS A KID, MY PARENTS explained to me, several times, that I should not put my hand close to a burning flame or an oven because I could be burned. And, as is almost always the case, I got burned--several times! I was also told that animals never make the same mistake twice. They will only get burnt once.

Why do I bring this issue to the forefront? Because it seems that the stimulus package looks like something I have seen before. In fact, some of the provisions are extremely useless and even dangerous for the future sustainability of economic growth.

Why? Because if the government gives incentives to purchase goods and services then consumers will use the incentives, firms will keep on producing those goods while the incentives apply and demand will plunge once the incentives disappear, delaying the day of reckoning that some industries need to go through in order to come back. Furthermore, any tax break for households runs the risk of being saved or used to pay down debt instead of being used for consumption. And this normally happens with any measure that tries to benefit the economy through indirect channels. Thus, the best strategy for any sustainable recovery has to deal with direct job creation and, if possible, has to be in partnership with small business.

A large component of the current crisis has to do with confidence: investors have lost so much money that they do not have confidence in the U.S. financial system, and until we are able to fix what is wrong it will be very difficult to bring back confidence to the market. Well, the same thing happens to the U.S. household. Many U. …

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