Should the Fed pay interest on deposits?

Steve Randy Waldman says yes:

I would support a standalone act authorizing the Fed to pay interest
on deposits immediately. I would prefer that Congress impose limits on
the quantity of deposits on which interest can be paid, to limit the
risk and interests cost to taxpayers, but that limit could be quite
loose for the moment. This approach has the advantage of getting
liquidity into the banking system far more quickly than the Paulson
Plan ever could have, and drawing a clear line between the liquidity
and capitalization aspects of the plan. It could be implemented
immediately by passing the one sentence Section 128 of the Paulson Plan
in isolation (although again, I’d prefer to muck it up with a limit on
the quantity of paid deposits).

Freed of its balance sheet constraint, the Fed might consider
injecting funds into the banking system by purchasing a diversified
portfolio of holdings in money market funds that trade in commercial
rather than government paper. This would help relieve the stresses in
the commercial paper market very directly, and reduce the likelihood of
a disorderly adjustment in nonfinancial commercial credit markets.

On a different tack, here are some very good ideas from Paul Light, an expert on bureaucracy.  And did you know that the FDIC currently has the power to guarantee short-term interbank lending?  The Paulson plan was in fact quite slow, so maybe its failure will force us to look for other and better options.


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