In Which I Agree with Free Exchange...
Who writes:
Out of running room: I THINK Brad DeLong misread this post of mine from yesterday as a shot at him. It wasn't. I agree with him that the constraints which seem to be draping themselves across American policy options are worrisome. I was more focused on those who seized on his earlier post, on how the whole AIG mess has likely soured the American public on big interventions, as a reason to refight old battles about the coddling of banksters. Those responses struck me as off base and unhelpful....
I have been trying, over the past few weeks, to argue that the Fed has been derelict in its duties. As Mr DeLong says in a different post:
Quantitative easing--pouring a whole bunch of cash in the system with the idea of never reversing the money stock expansion could boost spending and employment considerably by creating expectations of inflation and so reducing the spread--but the Federal Reserve is not going there, and regards the idea with horror, shock, and shame...
This seems to be true. At the same time, I think it will probably be easier to sway Fed officials (who are more likely to be impressed by economic arguments) than it will be to convince Congress to pass any kind of fiscal package large enough to have an effect despite the too-tight nature of monetary policy.
I don't like where the American economy is one bit. I think that the Fed is ignoring the political economy effects of its stance, and is therefore settling on an inappropriate policy. I hope that changes.
But I don't think drawing and quartering Lloyd Blankfein or Hank Greenberg will do any of us much good...
I do wonder how much good would be done if the FOMC were simply to stand up and announce that they were raising their long-term GDP-deflator inflation target from 2% to 3%. It might do a lot of good. And it is certainly something the Fed could do without cracking its credibility as committed to low inflation.
But they won't. We would need a very different FOMC than the one we have to consider such a move.
