Sunday, November 27, 2011


"What Could Ben Bernanke Do?"

"I can't blame Occupy Wall St..."
UC Berkeley economist Brad DeLong puts himself in Ben Bernanke's shoes and comes up with a Fed strategy to...uh, pull the country out of a deep ditch. Given that the Federal Reserve has autonomous power,  monetary policy is still feasible in the near term while every other path is "gridlocked" by dysfunctional and/or corrupted politics. Wonky but worthwhile suggestive commentary on a crucial piece of the economic puzzle:
(T)he Federal Reserve might be able to spark a real economic recovery by…
1. Announcing that it is going to keep short-term Treasury interest rates low not just as long as the economy is depressed but even afterwards when the economy has recovered and when it would normally be raising interest rates: that it is going to keep short-term Treasury interest rates low until it generates an inflationary boom, and that you had better start building capacity now to serve your customers during that inflationary boom or your competitors will do so and take your profits.
2. Not just announcing but actually bailing-in the taxpayers of the United States of America as the risk-bearing partners of American financial institutions: with the taxpayers as their risk-bearings partners, financial institutions that were previously tapped-out on their risk-bearing capacity will now have the ability and the incentive to make more loans at more attractive terms to more potentially-expanding businesses.
Now it is certainly true that (2) is not monetary but rather fiscal policy: commitments by the U.S. government to spend the taxpayers' money in certain states of the world. But I don't see why the Fed should not do it. And (1) is definitely within the Fed's purview.
How well would (1) and (2) work? We don't know. Are they worth trying? I certainly think so, and I believe that any of the alternative candidates for Fed Chair I heard back in 2009--Blinder, Dudley, Summers, Yellen--would at the least be thinking much harder than Bernanke appears to be about whether (1) or (2) or ideally both at once are worth trying on a large scale.
Me? If I were in the hot seat, I would follow the Jan Hatzius plan: (a) take the Fed's balance sheet up to $5T over the next two months, and (b) say that if that turned out not to be enough to get nominal GDP growth to a path that will return it to its pre-2007 trend within three years, that I would then keep interest rates low and take the Fed's balance sheet even higher until it did.
We are not going to get meaningful economic recovery until something boosts demand enough to get the monthly hiring rate up to something close to 4% of the labor force than 3%, and if not expansionary monetary policy, then what?

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