Stimulus for Savings?

Alex Tabarrok asks why, instead of spending $700 billion on buying bad debt we don’t just take direct action to stimulate savings:

I see the key issue as follows: Banks bridge the gap between savers and firms. We want to keep capital flowing to firms even when some of the bridges collapse. One approach tries to prop up the collapsed bridges, a second approach tries to route funds across substitute bridges. A third approach is to increase the flow pressure – in other words, I suggest a temporary but large stimulus to savings.

I suggest that for the next 12 months contributions to an IRA account will never be taxed. We can modify this in various ways to cap contributions at a certain level etc. We can even make the proposal progressive – for the next 12 months contributions to an IRA account will never be taxed and the government will match $1 for every $10 saved for anyone with income below a certain threshold. The main idea is to increase savings.

This will, he says, do something to help recapitalize banks and more importantly it will offset any credit crunch. What’s more, for $700 billion I bet we could make the program considerably more generous than this in terms of match. Which isn’t necessarily to say that that’s what we should do. But in general, if I said “X is a problem, Y is the solution, the cost is $700 billion” I would be told “no that’s too much money.” If we accept the premise that we should incur $700 billion in new debt to solve the problem, then that opens up a very wide range of possible solutions. But I don’t see much of anything in the way of an effort to canvass the possibilities.