Brad has a nice memo on why expanding the government balance sheet is a good idea during a financial crisis.

Because of the financial crisis, the private capital market is not functioning as well. Until risks return to normal, the economy should do less intermediation through and financing of private borrowers. It should do more of something else. What is the something else? Well, a credit-worthy government is a perfectly good borrower and a perfectly good financer of economic activity. Its debt is a perfectly good way of transferring wealth from the present in the future—a way is exposed to none of the added risk generated by the financial crisis. The natural conclusion: if finance was at the appropriate balance between private and public borrowing before the financial crisis, we should have less private and more government financing afterwards—even without all the Keynesian and monetarist reasons for expansionary policy in a downturn.

For those who are too afraid of government spending to even contemplate raising it ever for any reason, note that all that is necessary is that the government expand its balance sheet.

As I have said before, in the extreme, if you look at the numbers the US government could simply suspend the collection of taxes until further notice.

Not only would this have the affect of rapidly expanding the outstanding stock of debt but it would serve as an incredible incentive to bring economic transactions forward in time.

And, I just want to hammer home here, the logic of this simply does not depend on your ideological bent. I know that some people want to insist that its all ideology but its just not.

Some things are true.

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