The Fed Could Use Some Help

Glenn Hubbard says the Fed can't do it alone:

We're Asking Too Much of the Fed, by R. Glenn Hubbard, Commentary, WSJ: The combination of eye-popping headline inflation of 5% year over year and dramatic expansions of the Federal Reserve's lending activities to limit the credit crunch raise a key question: Are we asking too much of monetary policy?

The simple answer is yes. The expansion of the Fed's lending has been extraordinary in scale and scope. But it is not the best response to the present credit crunch, and may bring unwelcome side effects. ... moral hazard. ... ... inflationary pressures. ...surging commodity prices ... weakness in the foreign-exchange value of the dollar. ...

It is asking a lot for monetary policy alone to carry the burden of supporting aggregate demand. Fiscal policy can play a role. Congress and President Bush did pass an economic stimulus package centered on tax rebates. But clarity about a positive future for the 2001 and 2003 tax cuts which bolster collateral values -- along with a cut in corporate tax rates to promote investment -- would offer a much more potent tonic. ...

I agree that Fed policy alone may not be enough to get the economy back on track, I've argued that for a long time. But tax cuts are not the only option for stimulating the economy, government spending can also be used, and in theory on short-run stabilization policy, a one dollar increase in government spending has a bigger impact on GDP than a one dollar tax cut. Infrastructure is an obvious target for spending, it's surely needed, but there are other areas that could use help as well.

If the worry is that the spending will be permanent, Democrats can play the Republican game, but actually mean what they say. A stimulus should be temporary, so - just like the Republicans do with tax cuts - put clauses in the legislation that say the spending expires at a certain date. There will be x dollars per year for y years to do z, and that will be it. That way, there's no long-run impact on the budget (unlike the real intent of the tax-cut advocates who, once the economy gets better, will argue against reversing the stimulus measures). If the goal is to stimulate the economy, there's just no need to limit the policies under consideration to some type of tax cut.

Comments

[Vigilance:]

I'd like to help the Fed. If they'd stand near the window, I'd be glad to help them out. The Fed is the PROBLEM, not the cure.

2008 Jul 21 07:53 AM

[Asbytec:]

I disagree. I think Bernanke is doing all he can. In the face of this derivative meltdown (shrinking money supply) he is loosening monetary policy to prevent shocking the economy into a recession.

He is and must ease the economy through a spending reduction, which I believe will be along term one. (We may have learned our lesson with the failure of greedy, risky derivatives...I pray.)

I have heard him say, many times in the last year, the Fed is working with the banks to get lenders to renegotiate loans to keep them solvent and homeowners in their homes. It might not be working as he'd like.

On the other hand, each time congress brings Bernanke before the committee, they just ask the same old tired questions. "What, in your opinion, can we do?" ("Would you repeat that, one more time? This time, in my good ear...")

He's been very calm, I'd have been yelling by this point. I just had to turn off the TV last week's testimony. I get tired of Bernanke repeating himself to the same old tired questions congress asked last time.

Yes, the Fed can use some help and it seems to be slow in coming from congress...who, by the way, has the oversight of the money supply. Maybe Ron Paul should be president.

2008 Jul 21 08:26 AM

[bearfund:]

For starters, the Fed could raise interest rates. Ultra-low rates kill growth just as surely as punitive rates do. With the printing press going, any investment looks riskier; high rates of price rises are detrimental to real growth. This is why everyone wants to own gold, oil, and food instead of investing in productive enterprises and contributing to growth. If the Fed raised rates to 8%, investment in dollar-denominated and/or dollar-producing assets would become attractive again. Until then, keep shorting Treasuries and buying gold with the proceeds. Productive it is not, but unlike most other strategies it is more likely than not to preserve purchasing power over time and perhaps even deliver a modest real profit.

2008 Jul 21 09:55 AM

[Asbytec:]

I am confident the Fed will bring interest rates around in due time. I hope very soon after the housing market bottoms out. I am a big proponent of a strong currency, but feel it's not the right move just yet. We're probably gonna eat a little inflation while spending and credit wind down and the markets adjust to these new (long term?) conditions.

And then, there is the Yuan...

2008 Jul 21 01:14 PM

[Jason Rines...:]

Fed should raise rates, marginally .25 each quarterly meeting. This shows the global investor there is coordinated Central Bank planning and actions. It would lift the dollar and begin curbing inflation for the consumer and take off speculative froth. Meanwhile, the article writer has a point and that is for government subsidies into infrastructure. This of course should be energy. Whom manages the subsidies is perhaps the bigger question. My opinion is spread out $200 B between the regional banks whom demonstrated fiscal responsibility these last five years. $50 B should be placed into the SBA, to provide loans to small business. The top is bloated and the bottom will get there hand-outs, but it is the middle that needs love to create true innovation in energy and the jobs that will create the floor to this downward spiral.

2008 Jul 21 04:33 PM

[bearfund:]

IThinkBig, the middle is just...gone. While everyone was looking elsewhere, "the top" threw gasoline on the inflationary fires while "the bottom" collected outrageous handouts from the Treasury and what was then the middle foolishly spent itself into oblivion buying overpriced houses, plasma TVs, and cars they can no longer afford to fuel. There is no more middle. Good night, America.

2008 Jul 22 01:06 AM