Econ 101: Deficits End Deficits

The Financial Times headlines screamed “Bernanke warns on deficit” when the Federal Reserve Chief really said that the government had to act quickly when facing a crippling economy and that we should “begin planning now” to restore fiscal balance.

What’s the plan? Well, restore the economy and then slow government spending while receiving more tax revenue.

How do you do that?

Pull out all the stops, which includes conventional, but unusually aggressive, monetary and stimulus spending policies and unconventional stuff like lending to banks, lending to businesses and home buyers, and taking over car companies.

Also, the Obama adminsitration threw in some unconventional negotating and turned lemons into lemonade: Hummers into an ongoing concern!

It turns out that China owning so much Treasury debt — a fact that made some apoplectic — is sweet leverage. Last week, Treasury Secretary Geithner negotiated for China’s sovereign wealth fund to buy — for $1.5-billion (what China earns in interest from the U.S. in a week) — GM’s Hummer brand, which keeps 3,000 jobs in my former hometown South Bend, Indiana, and Morgan Stanley equity so the bank can pay back the U.S. government and get out of the TARP program.

So, U.S. deficits are being deployed to buy the right things. The U.S. and Canadian government now own 70 percent of GM with the intent of preventing even more unemployment and cities and towns from going bankrupt by forcing the car company into an orderly bankruptcy and not a desperate one. A government official, Brian Deese, made that clear, which jives with Bernanke’s call to plan.

The plan to shrink a budget deficit is to grow a budget deficit.

Restoring a frozen market economy — where either crippling fear or buoyant greed motivate private deals — takes public purpose and bold moves.

Watch the numbers: We may need a second stimulus plan and bigger government deficit before the mess is over.