Although the logic for politician non-involvement in Monetary Policy is reversed in a liquidity trap, I still don't like the idea...
That said, I do think the CEA and administration should try to "work the refs" -- create momentum from top economists for more QE. Two people Larry Summers might want to have a word with are Mark Gertler and Michael Woodford, who've written such real-world-relevant papers as "Monetary policy in a world without Money", are prestigious, well-respected theoretical Monetary Economists who don't often privilege us with comments on real-world economic phenomena.
Yet, from their theoretical papes, they should be all over more QE today, and, of course, they are well-respected by Ben Bernanke.
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I think you vastly underestimate the political unpopularity of Fed intervention. To the man in the street/average Congressman, inflation is pure evil, full stop (just hang out in the comments section of any financial/stock board). The argument that the Fed might actually want to induce inflation is deeply counterintuitive - kind of like arguing the superiority of free trade. Sophisticated economists can come up with fancy arguments but it doesn't jive with "common sense". Second, if you want the Fed to buy up/guarantee private debts there's a word for that - bailout. The Fed has taken tons of heat from both left and right over "transparency", backstopping potential losses by Wall Street, saving AIG, etc - but more of that is what proposals like Gagnon's would require.
ReplyDeleteGood points. Actually, apparently the idea that it's better to create inflation is so counter-intuitive that even trained Macroeconomists at the Federal Reserve and Japanese Central Bank don't seem to get it.
ReplyDeleteAnd, if I were the Fed, I agree with you that I would stick to doing QE on public debt. There's plenty of long-term treasuries, and agency and state debt to go around... In any case, the common man on the street already believes the Fed is printing money like crazy even though its not, and the Fed is isolated from public rage in any case... perhaps too isolated.
--TV