Sunday, June 6, 2010

If I were Fed Chairman, here's what I'd do...



Even though Congress holds the key to economic prosperity, it is content to sit by idly, frozen by irrational deficit fears as millions of people remain out of work and as our economic product withers.

The Fed has tried to counter deflationary forces by putting interest rates down to zero, but this has done little.

There is, however, something very powerful the Fed can do to create prosperity again and if I were Fed Chairman this is what I'd do: The Fed should support the stock market by aggressively buying stocks. This is something the Fed can absolutely do as stipulated in Article 13 paragraph 3 of the Federal Reserve Act.

Buying stocks would act as a funding mechanism to businesses that are struggling because banks are not lending. It would also provide a "wealth effect" to households, which hold about as much stock as real estate. That wealth effect would translate into higher consumption and higher GDP and, eventually, the increased economic activity would cause the banks to lend again and the Fed could step out.

The problem is, the Fed will NEVER do this as it is considered too unorthodox (as if buying Bear Stearns' assets was not unorthodox) and if it did do it, I'm sure it would create some global outcry about how it is sowing the seeds of hyperinflation. (The line thrown out every time gov't or the central bank tries to sustain output and employment.)

However, if the Fed bought stocks it would be an easy way to circumvent Congress's intractable position on deficits and the subject of further stimulus spending. It would not add to the deficit and it would provide money directly to the private sector to invest and spend as it sees fit, without government direction. (A point that bothers lots of people.)

Furthermore, it would be much more effective than keeping interest rates at zero, which is doing absolutely nothing.

If I were Fed Chairman, that's what I'd do.

10 comments:

Mike Sandifer said...

That's an interesting idea. We do need more unconventional monetary policy.

Unfortunately, yes the inflation hawks would rise up and the Fed would then be considered a socialist institution by people who know essentially nothing about politics or economics.

A good start might be to replace the interest rate on reserves with a penalty. Then, obviously buying up more assets of some type could be required.

Again, I wish you were chairman.

Matt Franko said...

We are approaching the 2 year point that interest rates will have been at "zero".

I think the anniversary is in September/October.

Hank said...

Hey Mike, what about lower taxes? We could lower the fuel tax, payroll tax, taxes on social security, etc. Would this be the best way to put real money immediately back into the economy? Sadly, this won’t happen, taxes are used by our politicians for class warfare and control.

Mike Norman said...

Hank,

Yes, tax relief would be huge.

-Mike

googleheim said...

Germany is providing MASSIVE tax cuts !!! their only chance to do something 'supply side' ...
they are doing it now.

MortgageAngel said...

Wait a minute.. Are you saying you would settle for less than what Main Street deserves?

"in paradigm" understanding purports that the surest, fastest, and even safest way, out of this (this is a 'spreadsheet' recession!)underemployment/attack-on-our-standard-of-living fiasco is lower taxes via payroll tax holiday plus per capita Federal distribution to the States immediately and then annually.

The problem is there's more distance to overcome politically and so probably what motivates this proposal Mike N is sharing here is an expectation that at best we can realistically hope for a political compromise.

After all, and correct me if I'm wrong - Wouldn't the desired effects be much slower than the aforementioned plan which is the plan Warren has been talking about?

Also, as Mike S points out, no matter what you do, there's always going to be a herd (of sheeple) crying "Socialist policy!"

I think the reason there wasn't more political outcry as the Fed entered the mortgage backed security market is for lack of understanding i.e. mbs are perceived to be a different or more complicated asset to trade than is a stock in a company. --- just my digressing guess!

No. I think if Mike were Fed Chairman his highest priority would be to do what he does best and is the right thing to do. He would begin busting widely held conceptions with inarguable facts starting simultaneously with the Fed's member banks, the President, Senate and Congress.

Since this will take some time, in the interim I'd be all for granting dictatorship :) (now don't freak out - just get my drift without getting crazy, okay?) type rights for no more than 3 months as it would be long enough to prove the naysayers wrong. The rise in employment and productivity would = the people speaking louder than our government for a CHANGE. Our government officials are influenced by ghosts and those lobbying for ghosts!

MortgageAngel said...

As a side note - I'd like to share the latest GOP mailer that I came in my mail yesterday -

Window envelope

CHECK ENCLOSED in bold

Inside is a check for $40.00 to be used to match my check in the amount of $40.00.

How pathetic!

Mike Norman said...

Tax cuts are necessary now, but not going to happen because of deficit fears. The Fed is largely outside of the legislative process. What I am proposing is feasible, what Warren is proposing is not given the mood in this country when it comes to spending. I respect Warren immensely, but he is a political neophyte.

Matt Franko said...

MA,
Good observation that the MBS purchases were about the same as what Mike is proposing here...MBS and stocks are bascially 'Net Financial Assets' of the non-govt sector....if the Fed bought the one, why couldnt they just also buy the other?

MortgageAngel said...

Right! And it worked, right? Hmmm - hard to say! MBS rallied just a little short of where we are today way before they began purhasing. And considering where they are trading now? Near 90 days since the Fed exited.

Things that make you go Hmmmmmm :-\ mmm.

Hmm?

Maybe the Fed buying MBS steered needed investment away from the stock market!

No doubt Mike's strategy would play out as intended for stocks. BUT - interest rates would go up as private sector investment followed the Fed's moves!

Many people think the Fed entered the market to buy up the toxic mortgages.

We could write a song called
'Blame It On Ben' And then we should make t-shirts and bumper stickers...