WWJMKD?

David Ignatius has a great article in the post on what Keynes would do to respond to the financial crisis. Of course, he doesn't give any specific Keynesian policy suggestions, but he does outline why considering issues of liquidity preference, animal spirits, and investor psychology trumps Friedmanesque quantity theory of money logic at a time like this.

To his analysis, I only want to add a quote from The General Theory itself:

"For my own part I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital goods on long views and on the basis of the general social advantage, taking an even greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest."

Interestingly enough, one of Keynes's biggest champions today - Paul Krugman - has been quite skeptical this week about the state's ability to do exactly what Keynes thinks it can do - provide a better estimate of the "marginal efficiency of capital" than the market. I think Krugman's concerns have been overblown, though. He knows like everyone else that these assets are underpriced now. Krugman isn't worried that the state can't properly price the assets... he's worried that if they do properly price them they'll end up forking over a bunch of money to the banks with no strings attached.