Brad DeLong Describes The Only Form Of Quantitative Easing That Has Any Hope Of Working

The Business Insider ^ | 10-24-2010 | Joe Weisenthal

[blam]

Brad DeLong Describes The Only Form Of Quantitative Easing That Has Any Hope Of Working

Joe Weisenthal
Oct. 24, 2010, 6:34 PM

Nobody will defend the idea that quantitative easing can work without concurrent fiscal stimulus.

In an economy that's deleveraging, pushing rates lower won't do anything.

So what's the Fed to do in an environment where, thanks to the political situation, fiscal stimulus is impossible?

Basically, quasi-fiscal stimulus.

Brad Delong describes this:

...a quantitative easing program that is going to have bite should involve Federal Reserve purchases of long-term risky private assets rather than merely long-term U.S. Treasuries. Hiring PIMCO as an agent to manage a long bond index portfolio naturally comes to mind--if one could avoid its front-running.

And, of course, the most effective quantitative easing program of all would involve the Federal Reserve issuing reserve deposits and using that purchasing power to buy the assets that are the furthest away in their risk characteristics from short-term government bonds: bridges, dams, the human capital of American citizens, police protection, research and development.

This is just one level more controversial than the idea that was discussed last week, which was that the Fed could buy state debt. But the problem with both of these ideas is: there's no way the Fed will get away with them without inviting massive controversy and possibly the end of Fed independence.

Bear in mind that the relatively un-controversial idea of buying normal government securities (which will accomplish nothing) has some people wondering whether a new civil war will start.

So if a truly radical alternative asset buying program is what it will take for QE to work, we're screwed.

[screaminsunshine]

The dam would take less than 10% of the people to build today.

[An Old Man]

" So what's the Fed to do in an environment where, thanks to the political situation, fiscal stimulus is impossible?

How about just pulling up stakes, folding the tent and riding off into the sunset.

Then, we can all get to work and design a monetary system that works.

[Reverend Wright]

delong was wrong about the recession at the start, and supported candidate Obama’s original (proven useless in multiple jurisdictions and time periods) “demogrant” stimulus strategy.

http://delong.typepad.com/sdj/2008/01/economic-stimul.html

The only thing he got right in the blog post above was the idea that a govenment spending based “stimulus package” would be a lobbyist-pleasing christmas tree.

Before believing anything by this guy about quantitative easing, check out this blog post; especially the concept of government infrastructure spending creating “high quality” real assets.

http://delong.typepad.com/sdj/2010/08/this-is-indeed-a-gloomy-day-department-of-macroeconomic-policy.html

[Pearls Before Swine]

Whether or not it has some economic validity, it is a terrible idea IMHO. The Fed would acquire significant ownership in private assets by printing paper. Is that really a “purchase?” A purchase is when you exchange one thing of value for another. I think this would accelerate the perception that the dollar is going the Zimbabwe route.

Maybe that’s what’s desired... a little bit of inflation. The problem is that inflation generated this way is akin to a soft nationalization of assets, and will cause a loss of credibility of the government/Treasury/Fed. Not good.