Lessons for the EuroTARP from America's Experience
delong Twitterstorm: October 6, 2011

David Wessel on What the Fed Might Do--and, I Think, Ought to Have Already Done

And, IMHO at least, ought to have started doing at least two years ago:

Wessel: The Fed is not out of ammo, the economists at the Bank Credit Analyst insist, but….

There are three potential ‘nuclear options’ at the Fed’s disposal that could have a major impact on economy activity,

writes Peter Berezin, managing editor of the Montreal-based monthly report.

Unfortunately, all three options would be hard to implement and carry significant risks.

The three:

  • Target a higher inflation rate or pre-specified level for the consumer price index or nominal gross domestic product. Problem: “could undermine the Fed’s long-standing commitment to price stability.”

  • Stimulate bank lending by putting a tax on excess reserves, hoping that banks will the lend out the money if the have to pay borrowers to take the loans. Problem: “could lead to the collapse of money market funds and the disintermediation of the financial system.”

  • Buy corporate debt, equities, real estate or foreign currency. Problem: Could require an act of Congress. “Given that the U.S. economy remains stuck in a liquidity trap,” Berezin concludes, “fiscal policy would be the most straightforward way to stimulate….However, the likelihood that the U.S. will receive major fiscal stimulus anytime soon is close to zero.”

His bottom line: “The recovery remains subpar” and the stock market “characterized more by volatility than a clear upward trend.”

I see no risks in attempting any of these three--and great risks in continuing to dither