You know, I’ve had my differences with Brad DeLong–and I really can’t stand his habit of editing people’s comments–but he’s actually a straight shooter. Robert Waldmann had asked the entirely reasonable question, “Jan Hatsius (and Brad DeLong) argue that the Fed should declare its intention of buying whatever quantity it takes of long-term Treasuries to achieve a nominal GDP target. But what if there is no such quantity?”
DeLong’s response is breathtaking (as is just about everything coming from the big-guns pushing nominal GDP targeting):
The government can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn’t work, you buy bank and corporate debt. And if that doesn’t work, you lend JPMorganChase $30 billion on the security of Jamie Dimon’s dog. And if that doesn’t work, you buy equities. And if that doesn’t work, you buy the services of construction workers–by which time you are explicitly doing money printing-financed fiscal policy.
Whoa! Do y’all like the part about giving $30 billion to JP Morgan? Sorta puts Goldman Sachs’ recent endorsement of the approach in a new light.
But now for DeLong’s refreshing candor. He admits:
The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet…
This is what has frustrated me so much, about the people who are saying, “Oh man, the Fed did it again. They didn’t inflate enough back in the early 1930s, and they’re doing the same mistake this time around.”
Like DeLong is admitting here, I think if you asked 100 economists in 2007 what “shock and awe” would look like, in order for the Fed to show it wasn’t going to let the economy collapse like it (ostensibly) did in the early 1930s, then 99 of them would say a mere doubling of the Fed’s balance sheet would have been overkill. And yet, the Fed has done more than that.
I understand that the market monetarists (that’s the name they’ve settled on) are arguing that done properly, NGDP targeting back in 2008 wouldn’t have required such a big expansion of the monetary base. Yet if that’s true, why do the market monetarists persist in calling the Fed’s actions thus far “contractionary” and “too tight”? They should say something like “misguided” or “inefficient,” but not “contractionary” and “tight.”
If there’s a small kitchen fire in a house, and the fire department sends 50 pumper trucks that completely flood the next door neighbor’s house, I wouldn’t call for more liquidity. I wouldn’t say that the fire department had instituted a needlessly arid policy. Instead, I’d say they were pumping way the heck too much water, and instead they should have chosen a different target.
(Note that in this analogy, DeLong would say, “Keep pumping water at any structure in the neighborhood. Eventually you’re bound to put out that kitchen fire, even if it’s because you flood the whole town with 8 feet of water.”)