Time to Fill Those Fed Vacancies

Krugman on economic analysis at the zero bound:

A while back Goldman estimated that if it weren’t for the lower bound, the current Fed funds rate would be minus 5 percent, and that to achieve the same effect as a further 5 points of Fed funds cuts the Fed would have to expand its balance sheet to $10 trillion; I wouldn’t stake my life on those estimates, but they seem in the right ballpark. Obviously, the Fed isn’t doing that. [...]

The point is that while you can think of things the Fed can do even at the zero lower bound, that lower bound is in practice a major constraint on policy. By all means let’s yell at the Fed to do more, but when you’re considering other issues — like the effects of fiscal policy or the effects of renminbi undervaluation — you have to assess them in terms of the central bank you have, not the central bank you wish you had.

The thing to do, however, is not just “yell at the Fed” but yell at the White House to fill the vacancies on the Federal Reserve Board of governors with people who wish the Fed was being more aggressive. As Krugman says, there’s a lot of conventional wisdom out there that Ben Bernanke is being too aggressive and many of the regional bank presidents seem to be thinking that way. There’s an urgent need to counterbalance those people with other advocates of monetary expansion. There are political constraints operating on all the possible policy dimensions, and it’s important to push against all of them.