22 Jul 2010

Konfident Krugman

Federal Reserve, Financial Economics 7 Comments

Joseph Gagnon recommends a three-pronged attack by the Fed:

First, the Fed should lower the interest rate it pays on bank reserves to zero….Three-month Treasury bills currently yield 0.15 percent, and that rate, too, should be brought down to zero.

Second, the Fed should bring down the rates on longer-term Treasury securities by targeting the interest rate on 3-year Treasury notes at 0.25 percent and aggressively purchasing such securities whenever their yield exceeds the target. That is a 65-basis point reduction from the current rate of 0.90 percent….

Finally, the Fed could bolster the stimulative effects of these actions by establishing a full-allotment lending facility to enable banks to borrow (with high-quality collateral) at terms of up to 24 months at a fixed interest rate of 0.25 percent.

In response to this suggestion, Krugman writes:

We don’t know how well the Gagnon plan would actually work — but there’s no harm in trying, and large potential benefits. The only possible reason for the Fed not to be more aggressive now is fear of embarrassment, of not getting big results.

And now we really see Krugman’s cockiness, with the parts I’ve put in bold. I can understand if you’re using a Keynesian model, and you think that all things considered, in the real world it would be a good idea for the Fed to get more aggressive.

But to say that Gagnon’s quite specific recommendations have no possible downside?! Krugman really can’t see even a theoretical drawback to the Fed setting up a new lending facility?

In case you think I’m being a hypocrite, consider something on my side of the fence. In Carlos and my new book (which will be available for purchase and free download very soon–we’re just working out the kinks), we have a section talking about how the Fed and Treasury could link the dollar back to gold. Now I will be the first to admit that the specific plan we outline, could blow up in our faces. We think it would be better than the status quo, but it’s possible if we implemented the plan, that something could go wrong. There’s always problems like that, when you try to tinker with the regulatory apparatus.

7 Responses to “Konfident Krugman”

  1. Mike says:

    Soviet Flunkie: Mr Stalin, I’m afraid your economic policies have not been successful and, in fact, millions of people have starved to death since your policies were implemented.

    Stalin: Welp, there’s no harm in trying…teh potential benefits were very large, comrade.

  2. Daniel Hewitt says:
    • Bob Roddis says:

      Excellent comment.

  3. Dilip says:

    So what _is_ the downside? So far I only see a lot of hand-waving and the usual Krugman-bashing.

    • bobmurphy says:

      Well you can try this, for starters. More specifically, even on its own terms, what if G’s third point is wrong for setting up the lending for 24 months? Maybe the optimal amount is 13 months? How do we know that targeting 3-year Treasuries is the right thing to do, or that cutting by 65 basis points isn’t overshooting?

      Are you really saying it’s a stretch to think that created trillions of new dollars, and setting out to tinker with all sorts of interest rates, might POSSIBLY be a mistake?

  4. fundamentalist says:

    Even Milton Friedman wrote that monetary pumping will only cause inflation in the long rung. Big deal. If you don’t know real economics, then you don’t know the problems that credit expansion cause.

  5. Fascist Soup says:

    Krugman isn’t an economist, he’s a propaganda agent.

    Allow me to explain how this works:

    1. Krugman makes points in favor of stimulus
    2. Krugman makes points against stimulus
    3. Government implements stimulus (of course this will take place no matter if every economist in the world says its a bad idea)
    4. Economy implodes due to stimulus
    5. Revisionist media immediately shoves all comments by Krugman in favor of stimulus down the memory hole
    6. Krugman wins multiple Nobel Prizes in Economics for correctly predicting the stimulus would fail