President Obama faces the immediate challenge of getting funds again flowing through the financial system. And, apparently, his advisors are relying on “pump priming”—pouring money into the system to encourage more money to flow. This metaphor is misleading.
I grew up in a poor area of rural Louisiana where some families still relied on old style hand pumps. The process for pulling water from underground aquifers depended upon the vacuum principle—that is the (generally) leather seal in the pump casing would often dry between uses—loosening the seal and making a vacuum impossible. Pouring some water into the pump pipe would moisten the leather, recreating the seal and restoring the potential vacuum. That system worked well for many centuries.
But an economy is not a pump and the banks aren’t leather seals.
Bankers and other players in our financial system are sentient individuals, not machines. Unlike pumps, they must and do consider the prospects for future actions—that the forces that were artificially induced will soon dry up. And they suffer consequences unlike the leather simile.
Thus, our challenge is to ensure that we restore confidence that the forces that today start the financial waters flowing are not ephemeral, that the forces of economic freedom and responsibility have been restored. A set of arbitrary, inconsistent and short-term priming activities is unlikely to restore our system