QE 2.0

Monday, July 05, 2010 3 Comments

Have you ever read something so chilling it makes you cry?

Me neither but this would be the next best substitute (Wall Street Pit):

Yes, but how do we do it? Those of us in the blogosphere know about the possibility of unconventional measures like QE and/or higher inflation targets. And I think it is fair to say that this knowledge is pretty widespread; Krugman, DeLong, Yglesias, Tim Duy, Andy Harless, Ambrosini, James Hamilton, Ryan Avent, Nick Rowe, Bill Woolsey, David Beckworth, Josh Hendrickson, and many other bloggers have discussed these options. They certainly aren’t some sort of secret, or some oddball strategy that is only discussed at this blog. But almost no mainstream journalist or mainstream politician, of any ideology, seems to even know that additional monetary stimulus is an option.

Perhaps someone who reads this blog knows of somebody who knows somebody on the Congressional committees that will be interviewing Obama’s Fed nominees. If so, here are some questions to ask:

1. Ben Bernanke has often argued that monetary policymakers don’t run out of ammunition once rates hit zero. Do you agree?
2. Ben Bernanke has often argued that the depressed level of aggregate demand in Japan since 1994 could have been avoided if the Bank of Japan had tried unconventional monetary stimulus. Do you agree?
3. In 2003, Ben Bernanke suggested that the Japanese should have set a higher price level target once interest rates hit zero and conventional monetary stimulus was no longer possible. Would a higher price level target policy boost aggregate demand in the US?
4. Last year Janet Yellen suggested that “We should want to do more.” What does that means? Does Janet Yellen disagree with Bernanke’s view that monetary policy does not run out of ammunition once rates hit zero?
5. Does it make sense to increase the budget deficit at a time when monetary stimulus could also be used to increase aggregate demand?

I generally have little interest in conspiracy theories—with monetary economics so poorly understood, who has the need for nefarious plots? Some might argue that shining a light on this issue won’t help, that the problem is inflation hawks at the Fed who already know that monetary policy is effective at the zero bound. I don’t agree, and the analogy I’d use is the Iraq War. Even if you think than Bush and Cheney were determined to attack Iraq, and simply used WMD as an excuse (and I’d rather not debate that issue in the comment section) unless there had been a widespread belief in the press and Congress that Saddam was working on WMD, the Administration wouldn’t have had enough political support to go to war. For similar reasons, without widespread ignorance about the effectiveness of monetary policy at the zero bound, the Hoenigs, Plossers, and Lackers of the world would be far less influential. The Fed is even more dependent on the whims of Congress than the Supreme Court; so you can be sure that the Fed pays a lot of attention to public opinion.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


beebsblog said...

I'm not a economist, but it seems to me that interest rates should not be set in any way shape or form.

Let the market set rates. Banks could figure out pretty quick what the market clearing rates are on credit cards, home, and auto loans.

Oh yes, and close down the Fed and imprison Paulson, Turbotax Timmy, and Big BEN.


W.C. Varones said...

I'm afraid I agree.


Maybe it's just that I'm talking my book because I bought a ZB house and really need a helicopter drop bailout.

W.C. Varones said...
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