The WSJ claims that extending unemployment insurance is causing unemployment, and that their opinion is consistent with Summers’ past statements. Unemployment insurance can exacerbate unemployment in times of full employment, but these are not times of full employment. We know that employers have cut millions of jobs. That is why we see unemployment. It is not even disingenuous to argue that the insurance is causing our current unemployment. It is just dumb.

Summers’ response starts out reasonably enough. He gives the argument I gave in the previous paragraph. Then, though, Summers starts claiming that unemployment is stimulus. That’s pretty silly too.

Unemployment insurance has a minor counter-cyclical impact, but that is not why we have it. We have unemployment insurance because we’re compassionate. We want to help people in tough times, and if that creates a little inefficiency, who cares?

Extended unemployment, such as we are seeing now, is catastrophic for families. Unemployment insurance helps a little. We should extend unemployment insurance, but Summers diminishes himself by pushing the party line and claiming it is stimulus.

I’m as concerned as anyone about total government spending and the deficit. I’m probably more concerned than most about bank lending to business. But, conspiracy isn’t the problem.

Part one of Melloan’s theory is that the Fed is causing banks to be excessively risk averse. He says “The Federal Reserve, which supervises some 7,000 banks, has been telling bankers that they must cut risk.”

The FDIC reported today that there are 552 banks on their problem list. Banks have been charging off $40 to $50 billion per quarter in loans for a year now. Capital has been eroded, and banks are way overleveraged, in part because of excessive risk taking. You think that maybe banks should be more risk averse today? You think that maybe there is a rational reason for banks to lend less to business and purchase more government securities?

The real problem is not some government conspiracy. The real problem is the government’s quiescence.

Too many of our banks are zombies, and we face something like Japan’s lost decade if we don’t fix them. This is the single most serious United States problem today. It drives me crazy that we are wasting huge amounts of resources and political capital on second-order problems while ignoring the bank problem.

Robust recovery requires banks lending to businesses. Banks can’t lend to businesses until they are adequately capitalized, and the bad assets are off the books. We will not have a robust recovery and put people back to work until our banks are fixed.

Bankruptcy is one way to clean up our banks. Since the FDIC fund is currently upside down, -8.2 billion, this would require external funds to the FDIC. The other option is the one successfully used by Sweden. They nationalized the banks, cleaned them up, and resold them. This would also require an investment.

Either way, fixing the banks is a far better use of money than some Stimulus 2 program or even the unspent portion of the current stimulus program.

Their piece is titled “The Stimulus Didn’t Work.” They provide data and cite the work of two economic gods: Friedman and Modigliani. I think the argument is convincing, but then I never expected the stimulus to work.

The piece is well worth reading.

Paul Krugman will claim it didn’t work because it was too small. Of course you can always say that. After the inevitable recovery, less intellectually honest politicians will claim it worked. Heck, some are already claiming it worked.

There is a problem with this. There will be another recession some day, and there will be another stimulus, even if it is counterproductive. It doesn’t matter which party will be in office. Every administration going back to and including at least the first Bush has engaged in some sort of stimulus-type programs when faced with a recession. Clinton was lucky enough to not have a recession in his tenure.