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So, the Washington consensus is that the way to fix the problems caused by excessively lax monetary policy and imprudent lending and borrowing is even looser money and more imprudent lending and borrowing.

If you're expecting these guys to rescue the economy, you're nuts too.

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Washington goes nuts

With respect to economic matters, everyone in Washington, D.C. has gone nuts. The area needs to be quarantined to protect the rest of the country.

Recently, the Congressional Budget Office estimated that the federal deficit for this year would be $1.2 trillion. That would mean that the federal deficit would reach 8.3 percent of GDP. Federal spending would rise to 25 percent of total economic output in the United States.

These are unprecedented levels in the post-World War II era. They exceed previous records by large margins. The previous highs were reached in 1983, 6 percent of GDP for the deficit and 23.5 percent for spending.

In historically-challenged Washington, the current economic difficulties are routinely described as the worst since the Great Depression. Everyone in town must have sleepwalked through the 1970s and early 1980s.

In any event, even Washingtonians are willing to admit that the Great Depression was worse. So, what was the federal government's response to those economic troubles? Federal spending never exceeded 11 percent of GDP and the deficit never exceeded 6 percent.

And what should the federal government now do, given the news that spending and the deficit have already reached unimaginably high levels? The conclusion in Washington is nearly unanimous: spend even more.

The incoming Obama administration wants Congress to release the second $350 billion of the Troubled Asset Relief Program and enact an additional stimulus of around $800 billion over the next two years.

This would probably raise the federal deficit to nearly 12 percent of GDP and spending to over 27 percent.

Even without this additional stimulus, the federal government will have run up $3.3 trillion in deficits since 2001. Yet Washington is rushing into additional spending without anyone bothering to ask, much less answer, what would seem to be an obvious question: If $3.3 trillion in deficit-spending stimulus didn't keep us from falling into the recession, why the assumption that an additional trillion will get us out?

The TARP funds were supposed to be used to buy distressed assets, mostly mortgage-backed securities, from financial institutions. Instead, the Bush administration used them to put public capital into the banks.

Now, Fed Chairman Ben Bernanke is saying that financial institutions will not be stabilized until the distressed assets are, indeed, removed from their books. Gee, Ben, it would have been nice if you'd made that point before the first $350 billion got out the door.

Now that the federal government owns part of the banks, members of Congress want to tell them what to do, specifically make more loans.

The banks make money by lending. So, they are already making whatever loans they think prudent given their capital, the economy, and the creditworthiness of applicants. Any lending they made in response to this political pressure would, by definition, be imprudent in their eyes.

Meanwhile, to get the credit markets flowing, Bernanke and the Fed have been madly expanding the money supply and trying to drive down interest rates. Apparently they are working on the theory that the way to get more lending is to reduce the returns from lending.

Let's take a broad perspective. The country is experiencing economic difficulties due to the housing bubble bursting, a bubble caused in part by excessively lax monetary policy, and imprudent lending and borrowing in general.

So, the Washington consensus is that the way to fix the problems caused by excessively lax monetary policy and imprudent lending and borrowing is even looser money and more imprudent lending and borrowing.

If you're expecting these guys to rescue the economy, you're nuts too.