Jim wrote:
> If I were the Fed-head, but still subject to the usual political
> constraints, I'd first give up on the idea that monetary policy is the
> only way to manage the economy. Not only can fiscal policy help a lot
> -- if nothing else, by abandoning the sequester nonsense -- but there
> are other policies.
If we assume we have the Fed only, then knowing that fiscal policy
would help does not change the status quo. Bernanke has been saying
that with some insistence. It is helpful, I guess, but not very
consequential.
Now, if I had a personal conversation with Bernanke, I'd tell him, you
have to take action proportionate to the recessionary gap, because
that's your job. If you don't do it, you cannot pass the buck. If
you have the tools (and I strongly believe, from my place of
ignorance, that Bernanke can figure out ways to get around formal
obstacles and institutional inertia), then take action already. Now,
if you feel that you do not have the tools to do the job you swore to
do, then demand that proper tools be handed to you by whoever has the
constitutional power to do so. If Congress and the administration are
oblivious to your demands, then appeal to the public directly. You
swore to uphold the constitution, and sleeping at the wheel is a
violation of your oath. If your direct appeal to the public does not
pan out, resign in protest and go into a media rampage denouncing the
political obstacles, etc. Do not be complicit to the crime of keeping
the economy in a depression.
> As long as the economy is below full employment,
> incomes policies (wage and price controls) can be used to fight
> inflationary expectations and thus inflation.
Usually, these policies are not in the arsenal of a central bank. I
mean, the interest rate is a price, of course, and the price level is
sort of a price too. :-) And more or less credit, and open market
operations here or there can affect relative prices ("asset" prices)
and the price level, and all that. But, again, usually, controlling
milk or bread prices is not viewed as within the mandate of a central
bank. Not sure there's a loophole that would permit the Fed do this.
Central banks do banking for regular banks (and the Treasury), but
these things take two to tango. (I'm assuming here that Treasury is
not into tango.) Also, central banks control the money supply --
which entails a *lot* of leeway, if you think about it. The Fed does
not have to buy/sell Treasuries in the open market to
increase/decrease "liquidity." As far as I know, the official reason
why the Fed does this is because Treasuries are "simple" instruments
"the markets" understand and are used to. Bernanke moved decisively
beyond this silly habit, which was good. It showed that the Fed can
buy/sell whatever security the hell it wants. It's a bank! "Risk" is
a nonissue, because it is *endogenous*.
Say, X City issues debt, a securitizes it, and the Fed buys the
vehicle. If the Wall Street Journal says, hey, that asset is too
risky, since X City can easily go belly up, the Fed can respond, No
way! The Fed, under its full employment goal, is committed to making
sure X City wades through the current troubles, and as a result the
financial asset we're adding to our balance sheet is thus rendered
risk-less. Moreover, as the markets will see how determined we are to
support X City, then they will further lower the cost of financing for
X City, reinforcing the risk-lessness of X City. Done.
That said, the Fed cannot tax directly (again, inflation is a tax, but
you know what I mean) and cannot spend directly. That would be
"fiscal." Except that, as Nathan noted, the spending part can be
expanded significantly without adjusting the existing legal
boundaries.
What else? One of the Fed's obligations is to regulate and supervise
regular banking; at least in some areas. This is totally
underutilized. For example, I wonder if the Fed could do more through
those mechanisms to make sure credit is available for capital projects
in education, health care, urban infrastructure, greenification, etc.
at the local, state, and regional (multi-state projects) levels.
(Again, I'm assuming the federal government is not involved.)
I'm not contradicting Jim. I'm just adding to the speculation.
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