What The Fed Should Do


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Kevin Drum wants us to go beyond calling on the Fed to “do more” and start saying specifically what we’d like to see happen. The idea is that “the Fed needs cover for radicalism,” so here’s a maximalist agenda.

It all starts with framing. If I were in charge I would do this. First you take the price level at the start of the recession. Then you draw a line representing two percent annual growth in the price level from that point moving forward. Then I would say “I am absolutely determined to get the price level back in line with this trend and intend to take whatever expansionary measures are necessary to do the job. I urge Congress to assist in this endeavor by making the long-term budget deficit smaller and the short-term deficit bigger. But whatever Congress does or doesn’t do, I am committed to raising the price level with every tool at my disposal.”

I know some economists (Thoma definitely, and perhaps Krugman as well) disagree with this, but my view is that a very strong statement to this effect combined with even relatively mild action like cutting the interest on excess bank reserves to 0% would do the job. Where I come from, it’s easy for central banks to raise inflation expectations and difficult to lower them, so all we really need to do at this point is try. But if there’s a need to do more, then in addition to penalizing excess reserves you should fire up the helicopters and just give people money. Money financed fiscal policy would be an even better idea, and I think that if you explained it patiently to congressional leaders they might get on board, but if you don’t then just disburse the money.

Communicate to the business & popular press that the beatings will continue until morale improves and if anyone has any cash they’d best spend it ASAP because prices are going up. And communicate to the Chinese that if they keep their currency pegged to ours, I’m going to wreck their economy with inflation long before I wreck ours. Consumers will buy things. Firms will come up with stuff to invest in. Net exports will improve.

As Tony Montana might say, in a large depressed economy you gotta print the money first. Then when you print the money, you get the job and income growth. Then when you get the job and income growth, you get re-elected.