Bruce Bartlett despairs that nothing can be done to stimulate the economy, not even monetary policy:
I still believe that monetary policy requires fiscal expansion to be effective under current economic conditions. For example, those who advocate a monetary helicopter-drop of money to stimulate growth concede that the Fed doesn’t have the capacity to do it without some action by Treasury to distribute the funds, which would be fiscal in nature. It would also require congressional action that is very unlikely in the current political environment.
That basically leaves two things that the Fed can do: buy longer term securities and buy very unconventional assets such foreign currency denominated bonds. The first it has already done some of without doing much to get money circulating. The second would put the Fed at war with the Treasury, which jealously guards its dominion over exchange rate policy. It will also raise holy hell with the “strong dollar” crowd and undoubtedly invite foreign retaliation. It’s even possible that China could effectively sterilize the intervention by soaking up all the dollars created by the Fed.
I still think this is wrong. Timothy Geithner has already received appropriations to buy printer paper and toner cartridges for the Treasury Department. If Ben Bernanke is inclined to play along, there’s no bar stopping Geithner for literally firing up his word processor program and printing out pieces of paper that say “Take this to Ben Bernanke and he’ll give you $10,000.” Call such pieces of paper Geithnerbucks. Geithner can’t turn these Geithnerbucks into legal tender, but the Federal Reserve bank can decide to “buy very unconventional assets” such as pieces of paper printed out by Timothy Geithner. Such action, if undertaken at any substantial scale, would almost certainly cause people and businesses to become less inclined to hold cash and more inclined to trade their cash for some goods and/or services.
But the larger point I would make is that focusing on the precise microdynamics of Fed action is a mistake. What’s more important is how the Fed frames what it’s doing. If the Fed says it’s determined to push the price level up, and will keep trying things until it gets up to such-and-such a point then that will probably work. Conversely, if the Fed says it’s willing to intervene to prevent a total economic collapse but beyond that is determined to pursue a strategy of opportunistic disinflation then we won’t get robust recovery.