Some fans of Big Government
BOM's fave prof has some advice for our Keynesian expansionist rulers:
"Don’t engage in mindless fiscal expansions. Increases in public spending on current goods and services, especially public fixed investment, cannot really be turned on at short notice without major efficiency losses. If you want to stimulate demand, do it through tax cuts and transfer payments...
Deficit-financed tax cuts or public spending increases will have more limited effects on demand, the lower the fiscal credibility of the authorities. From the rising credit default swap spreads on even US and UK sovereign debt instruments, it is clear that the markets are not fully convinced... That problem will only get worse as the cyclical downturn lowers revenues and increases social safety-net-related expenditures.
It will also get worse because the full extent has not yet become clear of the financial support needed to prevent a collapse of the banking system and to enable a resumption of bank lending to households and non-financial enterprises. In the UK, the balance sheet of the banking sector are around 420 percent of annual GDP. The government is now effectively underwriting these balance sheets. No-one has any idea as to the quality of the assets on these balance sheets. Most assurances given by the banks themselves thus far have turned out to be inaccurate and/or lies.
In addition, financial support for insurance companies and pension funds may well be required to stabilise the system. Fiscal capacity in the UK is limited."
Summary: our fiscal position has already been blown to buggery; the financial markets are already losing confidence in HMG; don't even think about cranking up public spending any further (and see previous BOM posts eg here).
Now yes, the Prof was as wrong about the fallout from the Lehman collapse as we were. But just because that triggered a market panic only big government action was able to calm, doesn't mean that the markets will now give free rein to government borrowing. They won't.
Compare and contrast with our old friend Will Hutton. He has long scorned financial markets and is currently in his element. Today he argues for the government taking over the key functions of financial markets longterm.
Government or markets? We really are back to the Big Issue.