U.C. Davis Lt. Pike Pepperspray Blogging

What Could Bernanke Do? Monetary Policy Reponse to Tweeting Doug Henwood Deapartment

Over on the >Twitter Machine, Doug Henwood asks why us wild-eyed shrill types think Bernanke and his Fed should be doing more:

@delong @moetkacik I don't get the line that Bernanke isn't doing enough. Taking the Fed's bal sht up to $2t ain't nuthin'.

@delong @moetkacik Helicopter Ben can't compensate for stupid fiscal thinking.

@delong @moetkacik Has the phrase "pushing on a string" lost all its meaning?

@delong @moetkacik But fiscal gets the money moving. QE and such just festers on balance sheets.

First of all, Bernanke hasn't just taken the Fed balance sheet up to $2T. He has taken it up to $3T. That ain't chopped liver--that ain't even terrine de foie gras, truite fumée, champignons et poire.

Second, I agree that normal Federal Reserve policy--declaring that long-run price stability is job #1 while buying and selling short-term Treasury bills for cash--does absolutely nothing right now: it is indeed pushing on a string.

That said, the Federal Reserve might be able to spark a real economic recovery by…

  1. Announcing that it is going to keep short-term Treasury interest rates low not just as long as the economy is depressed but even afterwards when the economy has recovered and when it would normally be raising interest rates: that it is going to keep short-term Treasury interest rates low until it generates an inflationary boom, and that you had better start building capacity now to serve your customers during that inflationary boom or your competitors will do so and take your profits.

  2. Not just announcing but actually bailing-in the taxpayers of the United States of America as the risk-bearing partners of American financial institutions: with the taxpayers as their risk-bearings partners, financial institutions that were previously tapped-out on their risk-bearing capacity will now have the ability and the incentive to make more loans at more attractive terms to more potentially-expanding businesses.

Now it is certainly true that (2) is not monetary but rather fiscal policy: commitments by the U.S. government to spend the taxpayers' money in certain states of the world. But I don't see why the Fed should not do it. And (1) is definitely within the Fed's purview.

How well would (1) and (2) work? We don't know. Are they worth trying? I certainly think so, and I believe that any of the alternative candidates for Fed Chair I heard back in 2009--Blinder, Dudley, Summers, Yellen--would at the least be thinking much harder than Bernanke appears to be about whether (1) or (2) or ideally both at once are worth trying on a large scale.

Me? If I were in the hot seat, I would follow the Jan Hatzius plan: (a) take the Fed's balance sheet up to $5T over the next two months, and (b) say that if that turned out not to be enough to get nominal GDP growth to a path that will return it to its pre-2007 trend within three years, that I would then keep interest rates low and take the Fed's balance sheet even higher until it did.

We are not going to get meaningful economic recovery until something boosts demand enough to get the monthly hiring rate up to something close to 4% of the labor force than 3%, and if not expansionary monetary policy, then what?