Shoulda, Coulda, Woulda--But We Didn't Watch: Macroeconomic Policy in Recession Department
Jared Bernstein:
Shoulds Versus Coulds | Jared Bernstein | On the Economy: [T]his got me thinking about the relative value of important voices like Paul [Krugman]’s promoting what we should do right now as opposed to what, given political constraints, we could do. And I think now is a good time to emphasize the latter. Let me be clear. I totally agree that we mustn’t let “political realism” shut down our thinking on the best way out of this mess. And while that kind of writing sometimes feels academic to me, if done well (as Paul does it), it can slowly but persistently set the stage for actually doing the right thing when the political landscape shifts. Shift it will, and at that time, Paul will be among those who built the “new” paradigm from which economic policy will flow (“” around ‘new’ because most of this is known since Keynes)....
But then there’s this: There will be no WPA-type programs in our near future. There was no appetite for them in the Obama admin in the midst of the worst recession since the Great Depression and there’s a lot less now. The reasons for that are interesting and I’ll speak to them another day. But it ain’t happening. And please don’t accuse me of “negotiating with myself” here. I stressed above the importance of making those arguments, and I frequently made them myself as a member of the President’s economics team.
It’s also congenitally hard for politicians to get behind “a serious program of mortgage modification.” Those who advocate for this (the NYT editorial page, e.g.) are right, but they’re also downplaying a very binding constraint. The politics of this idea are deeply wound up in moral hazard. People forget, but it was precisely this action—giving mortgage relief to someone at risk of default and not to someone who was struggling to keep up their payments—that birthed the Tea Party...
Well, here is one idea:
Private mortgage financing in the U.S. right now is broken. The U.S. government owns Fannie and Freddie--the Treasury Secretary votes the shares.
Announce that the U.S. government is increasing its ownership of Fannie and Freddie from 79.9% to 100%, is consolidating them with the general government balance sheet. Announce that the Federal Reserve stands ready to support the price of Fannie and Freddie's bonds. Announce that the Treasury now regards Fannie and Freddie's obligations are now full faith and credit obligations of the U.S. government. Announce that Fannie and Freddie will buy up all mortgages at 95% of face value. Announce that Fannie and Freddie will then refinance any past mortgages they hold at 4.0% plus a shared-equity kicker.
That would be a substantial macroeconomic stimulus program. That might be expensive for the Treasury in the long run. (But it might well not: it would depend on whether the equity kickers balanced out the foreclosure costs, and on what happens to the government's cost of funds.)
As best as I can see, the benefits of such a program would be that it does not require congressional action--merely the cooperation of the Treasury and the Federal Reserve Board.
And the entire housing, real estate, construction, and homeowner lobby would get behind such a plan in a big, big way.
It's definitely a "coulda"...
Jared goes on:
You might say that with the likes of Cantor and Ryan is ascendance, there’s no point in even contemplating “coulds.” I think that’s too easy and the stakes are far too high for it. This is not a critique of Paul. As I said in my initial post, there’s no more important voice in the debate I’m trying to amplify than that of Paul Krugman. He’s one of the few writers I miss when he goes on vacation.... But here’s a challenge for Paul. I know he’ll keep writing “should” columns and that’s crucial for a better future. But for a better “now,” I’d like to see a column—maybe a few columns—called “What We Could Do.” He’s done a lot of this before—I don’t want to imply he’s divorced from the “now”—but this would be a good time for him, along with the rest of us interested in trying to make some desperately needed lemonade from some terribly sour lemons, to turn aggressively from should to could.
Well, the most obvious thing to do would be to recess-appoint Ken "6% inflation" Rogoff and Peter "I have a Nobel Prize in understanding structural unemployment" Diamond to the Board of Governors of the Federal Reserve.
Look at the members of the Federal Reserve right now:
- Ben Bernanke, chair, regards himself as the voice of the Fed's consensus rather than as the leader of the consensus.
- Janet Yellen, vice chair, understands macroeconomic policy and is an eloquent voice for sanity.
- Dan Tarullo, governor, is a smart man and a dedicated public servant--but he does international banking and international law, not monetary policy.
- Sarah Bloom Raskin, governor, is a smart woman and a dedicated public servant--but she does financial regulation, not monetary policy.
- Elizabeth Duke, governor, I do not know--and she does not do monetary policy either.
Of the twelve bank presidents, I trust Rosengren, Dudley, Pianalto, and Williams to understand both the Fed's dual mandate and have a reality-based view of monetary policy. That's not very many.
And two powerful, smart, eloquent, reality-based voices to the Board of Governors and to the FOMC, and we would have a Federal Reserve much more likely to do the right thing.
That's definitely a "coulda" as well...
As Duncan Black says:
Eschaton: Calculations: One can't read minds and distinguish between pure political calculations and ideology, though I tend to think they overlap frequently, but apparently the political risk of "the wrong people (aside from rich assholes) getting help and a ballooning federal payroll" was seen as a bigger deal than the political risk of "massive long term unemployment." I'm sure it's in part because they downplayed the risk of the latter, but...it's, uh, May 2011? The January '09 projection argued that if the stimulus passed, then unemployment would be about 6.8% now. Without it, about 8%. It's 9% now.
