Monday, 2 February 2009

Bailout = stimulus?

A story of how the bank bailout money is providing an indirect stimulus to the economy. Or would do, except that political pressure is stopping the bank from spending it!

I think Greg Mankiw posted a similar question last week:

Scenario 1: A bank receives $20,000 of bailout money and hires Joe the Plumber to refurbish its bathroom.

Scenario 2: A bank receives $20,000 of bailout money and lends it to Ted the Lawyer, who hires Joe the Plumber to refurbish his bathroom.

Which has the greater macroeconomic effect?

At the time I thought Mankiw was implying they were equivalent, but it felt like a trick question. I guess the answer might be that $20,000 of bailout, by increasing bank capital, actually enables (say) $100,000 or more of new lending. In which case Scenario 2 is preferable.

However, I have to ask: is Bank of America supposed to suspend all marketing activities during the course of the recession? Surely their marketing people have done some kind of analysis and decided this is a reasonable way to spend money and win customers.

Admittedly a lot of corporate sponsorship suffers from an agency problem - it's good fun to get drunk in a corporate box at a football game, especially if it's not your own money you are spending, and it may not always bring real marketing benefits to the company. So the politics may, implicitly, be about the agency issue. If so, that point is not being clearly made.

There just seems to be an assumption that money spent at the Superbowl is money wasted. Presumably banks should spend all their money buying...what? What exactly are they allowed to spend on? Maybe they really should cut back all their overheads and build their balance sheet purely to lend out. Although cutting marketing spend to pad today's profits is typically regarded as short-termism with a negative net present value, it may be that right now, short-termism is what we need. That's certainly the principle under which a Keynesian stimulus policy works.

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