MIT Professor Ricardo Caballero agrees with WCV: The Fed is doing it wrong - W.C. Varones

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MIT Professor Ricardo Caballero agrees with WCV: The Fed is doing it wrong

We've said many times here that the Fed stuffing the banks with cash only creates asset bubbles, and what's really needed is devaluation via a printing-financed tax refund.

The head of the Economics Department at MIT agrees:
The US economy is barely muddling through. While some of this is unavoidable given the magnitude of the financial shock that is slowly working its way out of the system, macro-policy still has an important role to play in preventing a relapse. Unfortunately, the Federal Reserve has the resources but not the instruments, while the US Treasury has the policy instruments but not the resources. It stands to reason that what we need is a transfer from the Fed to the Treasury.

This is not a step to be taken lightly, as much of the progress in central banking over the last few decades has been aimed at giving central banks independence from hungry executive branches. However, all good systems need escape clauses if they are to be preserved as the anchor for daily policy concerns. Moreover, the Chairman of the Fed should have the final, and perhaps the first, word over this matter.

Isn't quantitative easing just such policy? Not quite. Quantitative easing, when directed to Treasuries, adds a little bit of good to the mix by lowering the cost of funding public debt, and it also helps a little bit with the long-run cost of capital for the private sector. But these are second-order effects; the Treasury still increases public debt at a fast pace, and a slightly lower cost of capital doesn’t much help the private sector if aggregate demand is not there to buy the goods in the first place.

Instead, what we need is a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a “helicopter drop” targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury.

This comes to us by way of Steve Keen who has related excellent thoughts here and here.

HT: John Mauldin and T-Dub.

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