Thursday, July 12, 2012

Once more unto the breach

From Ryan Avent via Sumner:

The Fed has the ability to create as much money as it wants and can use that money to purchase every scrap of federal-government debt, every scrap of outstanding mortgage-backed securities backed by federal housing agencies, and as much foreign exchange as other governments will sell it.

Sure. And that would do absolutely nothing to remove debt (payment obligations) from the economy.

The problem is not that we have debt-as-assets (income sources). The problem is that there was so much debt-as-liability (payment obligations) that debt-as-assets became "toxic" (undependable income).

Rather than the Fed printing money and using it to buy up debt-as-assets, they should print money and use it to pay off debt-as-liability. This would destroy the liability and free up the economy to grow again.

The other thing, buying debt-as-assets, puts more money into the hands of people who already have more money than they need, and does nothing about the problem that brought the economy to its knees.


Woj said...

It's obviously difficult to make any inroads on this topic with Sumner (and many other MMs). One question though:
You mention "Rather than the Fed printing money and using it to buy up debt-as-assets, they should print money and use it to pay off debt-as-liability."
Based on my knowledge of the Fed, I'm not sure how they would legally do this. Do you have any specific ideas? Through purchases of either Treasuries or federally-insured MBS it seems the govt would still need to act in a manner to reduce the actual debt.

The Arthurian said...

Hi Woj. When I evaluate economic circumstances and seek solutions to problems, I am not hindered by my realism or my practicality :)

If the thing that must be done is not legal, then perhaps we should change the law. Perhaps more knowledgeable people than myself would know ways to do the things I know must be done.

On the other hand, Bernanke keeps saying he wants to find innovative solutions, and he wants to think outside the box and all.

At Interfluidity, Steve Waldman wrote: "Rather than distributing cash directly, the central bank could make transfers by giving out free lottery tickets. The winnings from these lottery tickets would constitute transfers from the central bank to the public."

Waldman: "Central banks can just adopt an old accounting fudge and claim that policy-motivated transfers purchase an intangible asset called 'goodwill'."

Waldman: "I know this all sounds a bit crazy, a new normal under which central banks would print money to fund lottery payouts and then fake an asset on their balance sheets to offset the spending. But these are perfectly serious proposals."

The first consideration must be that if we do not eliminate the economic problem, the economic problem will eliminate us. After that, I'm in favor of everything that fits.