Via Scott Sumner, Ambrose Evans-Pritchard says “dead-end defeatism” has a grip on America’s elite and monetary policy needs to step up and bypass the banking system:
Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public. This would gain traction on the broad M3 money instead of letting it collapse (yes, the “monetary base” has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory. This is quite different from the Fed’s QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke’s ‘creditism’ is certainly better than nothing, it is not gaining full traction. [...]
Dr Bernanke said in November 2002 that Japan had the economic instruments to pull itself out of malaise but failed to do so. “Political deadlock” and a cacophony of views over the right policy had prevented action. He insisted that a central bank had “most definitely” not run out of ammo once rates were zero, and retained “considerable power to expand economic activity”.
Yet eight years later, the US is in such “deadlock“.
Even in terms of “creditism,” however, I don’t fully understand current policy. Banks are required to hold a certain amount of reserves. Currently, however, the banking system is holding a lot of extra reserves over and above what’s required. And currently the Fed is paying interest on those reserves. If the idea is to juice the economy by encouraging lending, you need to stop paying that interest. You could charge a penalty, even.
Previous in TP Yglesias
By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.