If it were me, I would raise interest rates to 1.5%. I would also have the goverment hire people to repair bridges, improve the electrical grid, build and repair highways, dams, whatever, but I would hire a firm to actually run it for profit so that the dismal goverment worker mentality doesn't set in. I was reading on a web site and someone pointed out why it has zero chance of happening: "Paul Krugman mentioned this idea in the New York Times several days ago, claiming it was not a politically viable option. In other words, the Republicans would fight it tooth and nail, since they want "free market solutions" to economic problems, which translates into corporate welfare. The Dems could probably force a federal hiring bill through Congress, but they would spend all their political capital in the process. While the end result would be to put people back to work, get money in circulation again, and improve our infrastructure, the special interests would disapprove. We've created a government where federal spending has to indirectly pay a percentage to every group that supports it, and the unemployed have no lobby." I agree.
An unspoken problem is that jobs that don't pay enough to sustain a reasonable standard of living, say >= $25,000/Yr, are the sorts of jobs that are needed. Creating any job will not do. What is the point of creating a job where the person can't even pay his rent and food and transportation costs? In fact, if you want that person to spend and aid the overall economy, $25,000/Yr (about $12/Hr or about $100 a day) is probably not enough. If I am NKE, why should I pay someone $12/Hr when I can pay someone $2 a day in Indonesia or whereever to do the same job? As long as corporations get all the benefits of being a US corporation, but none of the downside, business will milk it for all it can. Free Trade has helped US corporations exploit the rest of the world. Someone prove me wrong.
In fact, zero interest rate policies have the unwanted side effect of the dollar being used in a carry trade. So borrow in the US, and invest in the rest of the world. How does that create jobs here? Have we learned nothing from Japan? Sure, the stock market goes higher on zero IRs, of that there is no denying and is obvious, but that only helps people that already have jobs. Is the solution to raise interest rates now that the banking system is stable? Notice, this suggestion to raise IRs has nothing to do with inflation. I am saying that it could be a kind of twisted logic at work here. Raising IRs may actually create jobs here. I would raise IRs to at least a level where the carry trade aginst the US dollar was not possible, and see what happens.
1)Carry trade. I have yet to see evidence of that, Roubini presents none(other than 'trust me I called the crisis'), banks are not lending. FDIC reports "Quarterly Decline in Loan Balances Is Largest on Record" "Total loan and lease balances declined by $210.4 billion (2.8 percent) during the quarter. This is the largest percentage decline in loan balances in any quarter since insured institutions began reporting quarterly results in 1984" Fed Senior Survey and Fed H.8 report show the same story Where is the evidence that prime brokers are giving money away so people can speculate everywhere?I'm more than willing to buy the story if you show me the numbers 2)Raising IRs wont create jobs dude. There are a lot of companies that did not go bankrupt because they were able to raise equity or issue junk bonds, TONS of jobs that were not lost. Junk paper was at around 23% in Q1, impossible to borrow at that and make money for most. Now at 9-10% these companies can actually survive, to the extend that the fed policy induced people to take risk in riskier assets they helped support the economy. Not to mention the fact the raising rates will kill housing overnight as the market will antecipates $1T worth of GSE paper being sold. Mortgage rates soaring, hurting banks,etc
Roubini believes the real rate of borrowing is like -20%, not zero. http://www.nakedcapitalism.com/2009/11/roubini-predicts-mother-of-all-carry-trade-unwinds.html I will respond to the rest of your rebuttals later.
The rest of the world reacted in accord with the information content of the Abu Dubai debt situation. On the other hand, US markets are reacting by buying the dip. One of the cornerstones of information theory is that low probability events carry more information than the usual. The Abu Dubai event falls under the high information content. It is possible that US markets are betting that they get bailed out, but imo the reaction of US markets to this event is like that of a race horse on blinders.