Unorthodox monetary policy vs. fiscal policy

The Fed is ready to do more, namely:

The Fed has already been buying mortgage-backed securities and said in
its statement that it would expand its intervention as needed. The
committee also served notice that it would purchase longer-term
Treasury bonds, a move that would drive down long-term interest rates of all types.

Two points are worth making.  First, defenders of large-scale stimulus point out that such measures may well not work.  That is true, but what are the conditions under which unorthodox monetary policy maybe will not work?  Low confidence and zombie banks, which are more or less the same conditions under which fiscal policy may not work either.  In that sense unorthodox monetary policy doesn't face a separate problem.

Second, cash and T-Bills have a broadly similar risk profile but cash and these other assets do not.  At some point monetary policy becomes fiscal policy too, as a quick look at the Fed's balance sheet will indicate.  So it's fiscal policy based on Treasury borrowing vs. fiscal policy based on Bernanke and money creation.  In a time of deflationary pressures, and a bad fiscal future, usually I would prefer Fed-led fiscal policy.  I do recognize that we are placing more weight on the Fed than it can bear, but of course at this point there are no good options.

Comments

What? The Fed Funds rate is zero? Waaaah waaaah.... monetary policy won't work! Right? WRONG.

Next, target the three month T-bill, then the 6 month, etc. Push them all to zero. Once you push enough of the yield curve to zero, the deflationary pressure is likely to subside. So great is the power of this policy that I think we could do it while cutting spending if we really wanted to. I mean, it HAS to work eventually, doesn't it? If you pump up the money supply enough, the real balance effect alone starts to overwhelm everything else.

I keep reading sentences like this one in your posting: "The committee also served notice that it would purchase longer-term Treasury bonds, a move that would drive down long-term interest rates of all types." Isn't that simply wrong? The assumption of the writer seems to be that the Fed will be buying bonds from private parties in order to shrink the supply and prop up the bonds' prices. I can't think of exactly why the the Fed would want to do that. Isn't the Fed actually talking about buying newly issued bonds from the Treasury, i.e., printing money and giving it to the Treasury to spend. The Treasury will still be issuing new bonds to the public, so the supply of bonds will growing, not shrinking. Or am I just wrong?

Sure, they can buy up all that automaker debt right? Drive those auto loan rates to 0% and allow them to pass through lower rates in prices right? Still, it is far from as stimulative as public spending directly. Private spending is too much in retreat due to precautionary savings, layoffs, lack of income, etc. That just isn't reversed easily.

Lord, public spending is more stimulative? Based on what?

The Fed actions, absent another supply shock, should be enough to turn the economy around. Until the impact of the stimulus bill drops the dollar, raises interest rates, and high taxes damage the economy

Why is there no media scrutiny of these Fed policies ex. which interests are set to benefit as there of fiscal measures or the federal budget in general. Non-orthodox monetary policies run it seems to me against the basic argument for central bank independence, namely, pursuing price stability free of political interference. Indeed I would argue that the Treasury could have undertaken many of the same measures the Fed has but of course that would have faced congressional oversight, much better to enact possibly momentous changes to the way the American economy functions free of the democratic process.

Yup. A Fed.-lead fiscal stimulus is what you have got; look at the lags before the spending and tax cuts part kicks in. The 'Stimulus Bill' looks like its designed to keep the fire burning once Bernanke has managed to get it properly lit. Putting out the inflationary fire (and winding down the Federal deficit) later on looks like it is also going to be Fed-lead. An interesting contrast with the Brits who have announced that they intend to wind down their stimulus deficit in what amounts to just the way they did it last time 12 years or so ago; see this.

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