Well that’s certainly something I’d never expected to see, some prominent pundits talking about my ideas on Bloggingheads.tv.
Brink Lindsey is sympathetic to my argument. Brad DeLong suggests that my plan would require the Fed to do twice as much bond buying as under QE2, and keep doing it month after month. (I.e. about $200 billion/month in bond purchases.) I’m not sure where he got those figures, but I won’t criticize him. After all, right after QE2 I said it was roughly half of what the Fed needed to do. He may have been referring to that comment, or perhaps that’s just his own take on what would be needed. Brad made the quite reasonable point that it’s politically difficult for the Fed to do enough to end the recession. I agree; if it weren’t difficult they probably would have already done it.
And yet, I’m not willing to give up so easily. Here’s a few other possibilities.
1. There are things the Fed could try that don’t involve printing money, and hence might be less controversial. The most obvious is a lower IOR. Interest on reserves is seen as a subsidy to fat cat bankers, and it’s opposed by many on both the left and the right. Of course if you believe the banks control the Fed, you will tell me this can never happen. But if the banks control the Fed, why would they let NGDP expectations fall so sharply in 2008, and again recently, badly hurting bank balance sheets.
2. The Fed could try Greg Mankiw’s suggestion of level targeting. That’s not a cure-all. But I’m convinced core inflation is likely to remain below 2% for some time. And 2 and 1/2 year TIPS spreads are only 1.3%. This would give the Fed room to ease. It would provide even more room if that started the level targeting from the point at which rates hit zero—which is the theoretically appropriate point in time, according to Woodford, et al. We are now well below that trend, according to either the core or headline rate.
3. The Fed could try for 5% NGDP targeting. This might be acceptable to the right, as it would take “hyperinflation” off the table. In addition, throughout history I’d guess that at least 75% of the economists who advocated NGDP targeting were right of center (Hayek, McCallum, quasi-monetarists, etc.) They could tell Barney Frank that unlike a strict inflation target it addresses the Fed’s dual mandate. I’d actually prefer slightly higher than 5% during the catch-up period. But things are so bad now that even 5% would be an improvement.
DeLong might argue that those alternative policies would also require the Fed to buy up lots of bonds. But that isn’t necessarily the case. Indeed if the policy were credible, it’s very possible that we could get by with a reduction in the currently bloated base, which includes trillions of excess reserves that are doing nothing.
So even though Brad DeLong’s skepticism about the politics of monetary stimulus is quite persuasive, I’m not willing to throw in the towel. There are things the Fed can do that are less controversial than QE2 on steroids, and surprisingly, might be even more effective.
HT: Dennis and Brito