(p. 4) “We got into this mess to a considerable extent by overborrowing,” said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. “Now, we’re saying, ‘Well, O.K., let’s just borrow a bunch more, and that will help us get out of this mess.’ It’s like a drunk who says, ‘Give me a bottle of Scotch, and then I’ll be O.K. and I won’t have to drink anymore.’ Eventually, we have to get off this binge of borrowing.”
“This is a dangerous situation,” says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a while longer, lest he burn down the neighborhood in the midst of a crisis. “The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now.”
. . .
The most frequently voiced worry about the bailouts is that the Fed, by sending so much money sloshing through the system, risks generating a bad case of rising prices later on. That puts the onus on the Fed to reverse course and crimp economic activity by lifting interest rates and selling assets back to banks once growth resumes.
But finding the appropriate point to act tends to be more art than science. The Fed might move too early and send the economy back into a tailspin. It might wait too long and let too much money generate inflation.
“It’s a tricky business,” says Allan H. Meltzer, an economist at Carnegie Mellon University, and a former economic adviser to President Reagan. “There’s no math model that tells us when to do it or how.”
For the full story, see:
PETER S. GOODMAN. “Debt Sweat; Printing Money and Its Price.” The New York Times, Week in Review Section (Sun., December 28, 2008): 1 & 4.
(Note: ellipsis added.)