What to do when interest rate cuts don't do it?
The Federal Reserve is supposed to regulate the economy. When the economy gets too busy, and there are bidding wars over illegal immigrant labor, they're supposed to cut off the flow of gas money. (Failure to do this, when it became obvious a housing bubble was inflating, is the reason that Alan Greenspan has gone from Wizard to Village Idiot, in Washington's estimation.) When the economy slows down too much, they're supposed to hit the gas pedal cut interest rates. This is supposed to increase the money supply, which results in banks lending more money to more customers, which increases spending. (Supply-side economics is part of this; in part, it takes as base assumption that the presence of a supply creates both demand and the funds to purchase.) When that doesn't do the trick, a tax rebate, like we had earlier this year, puts money directly in people's hands; then, like good little consumers, they go out and spend, which has the same effect on the economy. This is the way it works in what we call "normal times." It's how it's worked for the first 44 years of my life.
However, when things go too bad too fast, the economy doesn't work that way. People get scared, and hoarded money becomes their security blanket. Some economists call this set of rules "depression economics." The fact that only about 1/4 of this year's tax rebate (intended to delay the recession's onset until the first year of the next President's term) was spent is a huge hint that, although things aren't as bad as the 1930s, people are thinking in depression economics terms. Most of the bank bailout money is being hoarded by the banks; the banks are more afraid of not getting loaned money back, than they're greedy for interest income.
And so, in their last scheduled meeting, the Federal Reserve cut their interest rate to the bone. Instead of giving us a rate, they gave us a range: 0% to 0.25%. (I suppose that allows them to change things on the fly, instead of having to call another meeting to move it from 0.125% to 0.087%.) For all practical purposes, their next "rate cut" will be paying banks to take money.
This is all context for Forbes Magazine's guess at what the Fed will have to do next, rather than watch the economy collapse further:
But since the Fed is unlikely to sit back and watch the economy unravel, it will have no choice but to dance away from interest rates with an unconventional two step: Step 1: Print money. Step 2: Drop it from helicopters.
The idea of dropping money wasn't credited to some left-wing nutcase, but rather to Ronald Reagan's favorite economist: Milton Friedman. Would they literally drop money from helicopters? (If so, I want the flight path in advance!) Probably not:
In practice, dropping money from helicopters would likely mean a tax rebate. But instead of paying for that tax cut with a reduction in spending, or even an issuance of more Treasury debt, it would be financed by the Federal Reserve. ("Dear American taxpayer, We just printed $5,000 per person in new money. Go nuts.-Uncle Ben.")
Given ideas like this, it almost makes massive infrastructure investments seem more responsible, doesn't it? And, frankly, $5,000 per person is less than the $600 billion that Paul Krugman wants to be the 2009 stimulus package.
However, when things go too bad too fast, the economy doesn't work that way. People get scared, and hoarded money becomes their security blanket. Some economists call this set of rules "depression economics." The fact that only about 1/4 of this year's tax rebate (intended to delay the recession's onset until the first year of the next President's term) was spent is a huge hint that, although things aren't as bad as the 1930s, people are thinking in depression economics terms. Most of the bank bailout money is being hoarded by the banks; the banks are more afraid of not getting loaned money back, than they're greedy for interest income.
And so, in their last scheduled meeting, the Federal Reserve cut their interest rate to the bone. Instead of giving us a rate, they gave us a range: 0% to 0.25%. (I suppose that allows them to change things on the fly, instead of having to call another meeting to move it from 0.125% to 0.087%.) For all practical purposes, their next "rate cut" will be paying banks to take money.
This is all context for Forbes Magazine's guess at what the Fed will have to do next, rather than watch the economy collapse further:
But since the Fed is unlikely to sit back and watch the economy unravel, it will have no choice but to dance away from interest rates with an unconventional two step: Step 1: Print money. Step 2: Drop it from helicopters.
The idea of dropping money wasn't credited to some left-wing nutcase, but rather to Ronald Reagan's favorite economist: Milton Friedman. Would they literally drop money from helicopters? (If so, I want the flight path in advance!) Probably not:
In practice, dropping money from helicopters would likely mean a tax rebate. But instead of paying for that tax cut with a reduction in spending, or even an issuance of more Treasury debt, it would be financed by the Federal Reserve. ("Dear American taxpayer, We just printed $5,000 per person in new money. Go nuts.-Uncle Ben.")
Given ideas like this, it almost makes massive infrastructure investments seem more responsible, doesn't it? And, frankly, $5,000 per person is less than the $600 billion that Paul Krugman wants to be the 2009 stimulus package.