Are things moving our way?

Drudge highlighted an Obama request that Americans not “stuff money in mattresses.”  Here is the article it is from.  I know he’s talking about consumer demand, not money demand, but the Depression-era rhetoric may get people thinking about the need for monetary stimulus.

Bill Woolsey just sent me a link showing that in February the Baseline Scenario had also argued for unconventional monetary expansion.  After discussing why fiscal stimulus and banking reforms (which they support) would not be enough, they went on to suggest a more aggressive monetary policy:

8) A rapid return to growth requires more expansionary monetary policy, and in all likelihood this needs to be led by the United States. But the Federal Reserve is still some distance from fully recognizing deflation and, by the time it takes that view and can implement appropriate actions, declining wages and prices will be built into expectations, thus making it much harder to stabilize the housing market and restart growth. The European Central Bank still fails to recognize the seriousness of the economic situation. The Bank of England is embarked on a full-fledged anti-deflation policy, but economic prospects in the UK still remain dire.

I couldn’t agree more.  But how can something that’s been obvious to me for quite some time (and also to the very smart guys at Baseline Scenario), not be obvious to the ECB?

Update:  JimP sent me the following link from Tim Guy’s blog:  He criticizes Bernanke from more of a finance perspective.



5 Responses to “Are things moving our way?”

  1. Gravatar of David Beckworth David Beckworth
    9. March 2009 at 06:41


    I too hope the tide is turning for making more use of unconventional monetary policy. I know Nick Rowe also is behind the idea.

  2. Gravatar of Alex Golubev Alex Golubev
    9. March 2009 at 07:46

    three points:
    1. one of the few things that people are currently afraind of are inflation and hyperinflation. it seems like “the TV” has really hammered that point into the public soft spot. this is the last thing we shoudl be “afraid” of. But i think and maybe this is stating the obvious that fear of inflation is good and any sign or expectations of it will get the consumer to spend. I thought Bernanke was the expert on Depression.
    2. Negative interest rates – lead to banks hoarding. i’m still struggling with this (sorry). i got an idea. required the banks to not hoard. (stick this in the WTF category). I couldn’t care less what the banks would liek to do. last i checked FDIC is FORCING banks to hoard money, while the proverbial “other” arm of the government is questioning what the banks did with the bailout funds. Hoarding IS the responsible thing to do for banks. they have huge losses coming. But if the government wants to USE the banks as intermediaries that they are and oughta be, then a little force will do a lot of good. Banks, borrow the funds and fed will pay you x% IF you lend it out or else(am i missing something yet again?)
    3. Velocity of money. This is what’s broken!!! 1 and 2 relate to it, but people need to diagnose exactly why velocity is broken and what to do about it. first of banks are rightly hoarding cash. underwriting parameters and insanely conservative now. Even if banks were given monopoly cash to lend, they’re NOT lending to people that really need it. (i know that at this poing even the 50% LTV borrowers are hoarding and not consuming) but i’m pretty sure the JUMBO loan market is where most destruction is happening. now the question of what do we do about it ufortunately runs into a lot of moral hazards. i think handouts are nto the answer and there’s plenty of cash from SAFE entities that should be encouraged to help out the risky ones. my guess is that we’ll arive to that point not through reason (cause our gov’t lacks the brains and mroe importantly the incentives) but simply through necessity. my only worry is that leverage might be dangerously high, but i ready somewhere that M1 and money base are crossing over, so maybe it’s not “bank run” bad after all. private/public enterprises are in my opinion the best solution, because at the very least the same taxpayers that would have otherwise PAID the final bill are also the same people that would be incentivised to take on the risk and get paid. I wish Don Quixote was available to comment on these schemes himself.

  3. Gravatar of ssumner ssumner
    9. March 2009 at 16:13

    David, Thanks for the link. I have been so overwhelmed with keeping up with the blog that I overlooked Nick’s blog (and your blog looks really good as well.) I will do a post commenting on Nick’s blog either tonight or tomorrow, and I hope you will take a look at it. I really appreciate the support and will take a closer look at your blog when I get beyond this busy stretch.

    Alex, Yes, people say they are worried about high inflation, but are they really? Do they expect house prices to rise fast, for instance? I have my doubts. Banks may need some excess reserves, but not this much. Remember there are other liquid assets that the FDIC would presumably view as safe, like T-bills. I’d rather they hoard T-bills and get the cash out into circulation. Velocity is a key, and is really the flip side of hoarding. I think my plan will reduce hoarding and speed up velocity.

  4. Gravatar of Jon Jon
    9. March 2009 at 18:51


    Baseline Scenario has been a disappointment for me. They’ve very much fixated on the financial crisis as the driver of the malaise. Their focus on monetary stimulus has been prescriptive rather than diagnostic and more geared toward Keynesian ritual.

  5. Gravatar of ssumner ssumner
    10. March 2009 at 11:25

    Jon, I just read a bit on that blog, but check out Nick Rowe’s blog–he has a very good understanding of monetary policy.

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