Robert Shiller says we need more stimulus and also more bank rescue, and perhaps more provocatively says that what we need to do is set explicit policy targets. One would be a demand target, and one a credit target:
Following this target, aggregate demand should be sufficiently high that firms producing good products at a price the public would want to pay will be able to sell them. And if this target is met, skilled labor willing to work at a wage that makes it profitable to sell such products will be able to get a job.
The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies, but there should be an explicit measure of their success, and until that is reached, the scale and time frame of such policies need to be extended.
Ever since it initially became clear that the administration might have some trouble getting a stimulus bill through congress, the administration has taken basically the reverse tactical approach. They’ve taken as much stimulus money as they can get, and have been declaring the resulting stimulus program to be likely to work. Similarly, on the banking front they’re scrambled to put together the PPIP with funds that they’ve already been giving and have been declaring that program likely to work. In both cases, however, mostly outside analysts who broadly share the administration’s perspective think that the political constraints are forcing them to do too little.
A different take would be to establish targets. We want demand at this level, and credit at this level. Then you could be clear that the measures currently underway will probably help, but are unlikely to be fully adequate. Shiller says “It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.”