Wednesday, December 16, 2009

How Confused is Alan Blinder?


First, a small mistake: Blinder says "we've spent less than 30% of the stimulus."

Trouble is, we've already spent more than 30%, but he wasn't off by that much according to this or this, neither of which count "works in progress" as money which has been spent, so it might be more like 34% which has been spent to-date. The stimulus has been a bit slow. And its a good thing there is still a lot left, so Blinder is probably correct that this is a reason for optimism.

What upset me was when Blinder wrote: "And third, the Fed continues to inject more medicine. Not by cutting interest rates, of course. Zero is as low as you can go, and the Fed arrived there a year ago. But "quantitative easing" is still in play. One example is the mortgage-backed securities (MBS) purchase program, which is adding MBS to the Fed's balance sheet and providing vital support to the mortgage market. Yes, the Fed has begun to think about its exit strategy. But that is for the future, not for now."

Except, as I've mentioned before, the rate of QE has been so slow that, on net, the Fed's balance sheet has shrunk since the first of the year. The Fed has already finished its $300 billion purchases of Long-term bonds, and is almost finished w/ its other purchases of MBS and Agency debt. Plus the government is already winding down other programs, so on net, the expansionary posture Blinder sees is an illusion...

BTW, did anyone else see that November's Core CPI was flat? With very little sign of growing inflation, yet high unemployment, more QE is really a straightforward policy response. Overshooting on the side of being too inflationary has very low probability right now, and would not even be all that damaging. Overshooting on the side of doing too little inflicts massive (and unnecessary) pain. Ryan Avent has this exactly right.

Do not confirm Ben Bernanke.

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