24 Mar 2009


All Posts, Potpourri No Comments

* Tyler Cowen links to a piece that explains a strategy to game the Geithner plan.

* Oh man, more talk about the Fed’s “weapons” at Mankiw’s blog…Check it out:

Some people are concerned that in the the fight against recession, the weapons of monetary policy are nearly out of ammunition. That is certainly the case for the standard monetary weapon–cuts in short-term interest rates. After all, short-term interest rates are already about zero, and the Fed cannot cut interest rates below zero.

Or can it? In a discussion at a Harvard seminar recently, a clever grad student proposed a solution to the zero-lower-bound problem.

…I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 2 percent. Losing 2 percent is better than losing 10.

Folks, at this point can we admit that the mainstream models are BAD? If you’re trying to figure out how to help the economy, and you end up concluding, “We might try randomly turning off 10% of the dollar bills,” then I think you need to check your assumptions.

To repeat a point I’ve been making lately: Does it make any sense that after everyone realizes we were all consuming way too much, and we all need to buckle down and save like crazy, that the solution involves…negative interest rates?!

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