Wednesday, March 18, 2009

Feds Gone Crazy

They're buying up hundreds of billions of dollars worth of Treasuries and high rated debt.  

I don't have much to say on this, but here's John Cochrane:

In sum, there is a plausible diagnosis and a logically consistent argument under which fiscal stimulus could help:  We are experiencing a strong portfolio, precautionary, and technical demand for government debt, along with a credit crunch. People want to hold less private debt and they want to save, and they want to hold Treasuries, money, or government-guaranteed debt. However, this demand can be satisfied in far greater quantity, much more quickly, much more reversibly, and without the danger of a fiscal collapse and inflation down the road, if the Fed and Treasury were simply to expand their operations of issuing treasury debt and money in exchange for high-quality private debt and especially new securitized debt.

We can get rid of interest on bank reserves (and consider a penalty rate), set an explicit nominal target, and engage in quite substantial quantitative easing using indexed bonds (and perhaps a few foreign government bonds) without incurring much risk at all.  And even if we have to eventually move more heavily into assets more exposed to U.S. inflation risk (long term T-bonds) I don’t see how those risks are any worse that what we are now doing at the Fed.  Isn’t a risky policy that has a good chance to boost AD superior to a risky policy that has little chance of achieving that goal?

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