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Aug 19

A better way to boost demand

Posted by Ron F in Riskrecoveryrecessionfinancial market reformfinancial crisisFederal ReserveFedeconomycareer advancementbubblesBanksbank lending

Ron F

Bear with me here. This is going to be one of those "out there" posts. But Steve Randy Waldman takes an interesting stab at a problem I've been wrestling with, at least in the furthest reaches of the financial corner of my brain, since the financial crisis began.

And that is how to stimulate the economy without creating another asset bubble. It sounds easy enough to the Keynesians, but as Waldman has pointed out before, rebooting aggregate demand through traditional government action may simply create another bubble. And ultimately, the distinction between monetary and fiscal policy may be moot.

So what Waldman proposes, in effect, is to remake the Federal Reserve's mission. How this might be done, given the current political climate, is beyond me, and he didn't address the process involved in such a transformation. But the goal makes eminent sense.

Essentially, what he is suggesting is to have the Fed hand out money to the population instead of inducing banks to lend. That's right. The central bank would really do the so-called "helicopter drops" that Bernanke wrote about.

And get this: He would address what is perhaps the thorniest downside of such largesse, a lack of work incentives for the populace, through a lottery system, so not everyone could bank on such transfers and thus be content living off "the dole."

Sounds crazy, I know. Welfare for most, or at least some, on a random basis? Well, none of the objections I've seen to the idea in the comments seem to carry much water. What are low interest rates supposed to do, after all, but put money into people's pockets at very little cost?  

Lest you dismiss Waldman as a crazy blogger, he was one of several who visited the Treasury the other day, as Yves Smith pointed out. Not that the Treasury takes any of these bloggers seriously.

 But hey, stranger things have happened since the Fed helped JPMorgan acquire Bear Stearns and then started throwing money at other banks. And they've simply been turning it over to shareholders.

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