Well, the arguments for what the Fed could do were largely attributed to Paul Krugman, a Nobel laureate in economics, so it wasn't too hard to find. Nor is it too hard to understand Krugman's suggestions:
- First of all, be bold and try actions other than the usual limited set of raising or lowering the Fed fund interest rates.
- Buy longer term government bonds and government-backed mortgage securities. (Krugman reports that the Fed is currently doing this.)
- Change the inflation target from 2% to 4%, signally that the Fed will continue pumping money until there's enough growth to start having significant inflation pressure.
With only one additional action being suggested, I would think our society or pundits could have a substantial debate. So what are the pros and cons, the risks of pursuing this course or not pursuing it?
- Pro, from Krugman: "If the Fed were to raise its target for inflation....it would help persuade investors and businesses alike that sitting on cash is a bad idea.
- Con, from the American Enterprise Institute: Inflation lowers the purchasing power of dollars, which mean higher prices for commodities like oil.
What I find strange is the lack of more discussion. Is this all there is? No more ideas for what the Fed could do? It's no wonder that the economy is rebounding so slowly. The Fed can't really do much more, the Congress and president can't agree on what to do, the rest of the world either has its own problems or they aren't looking to pump us up. So, no quick fix. How unAmerican!
|Inflate your way to riches.|
Economist article with comments
St. Louis Fed comments
Background comments by Bernanke
Related argument on quantitative easy from AEI: The low interest rates force investors into riskier investments, like commodity speculation. Lovely.
Four specific suggestions with rationales from an economist. Many times better than Krugman, but more work to read.