The Impotence of Monetary Policy
The prospects for household spending depend to a significant extent on how the jobs situation evolves. But the pace of spending will also depend on the progress that households make in repairing their financial positions... But on the other hand, the upward revision to the saving rate also implies greater progress in the repair of household balance sheets. Stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.Agreed. But then here are the policy options he puts forth.
A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve's holdings of longer-term securitiesHow does changing the term structure of Fed assets help households repair their balance sheet?
A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement.How does the Fed saying different words help households repair their balance sheet?
A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve SystemHow does lower IOER (already just 0.25%) help households repair their balance sheet? Actually, this seems to make things worse, whereas the others have simply been irrelevant.
A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability.And what mechanisms does the Fed have in place to help it achieve its "medium-term inflation goal" regardless of where that goal is set?
What's happening is that, in a time of over-indebted households and weak aggregate demand, workers are simply losing their jobs and remaining unemployed. While unemployed, they draw Government benefits, and thus maintain some baseline level of consumption, avoiding 1930s style debt deflation. At the same time, this large pool of unemployed workers mean businesses can keep wages down, sell into what Government supported aggregate demand is there, and pocket the rest as profits.
The big lever here is fiscal policy -- announce a payroll tax holiday, and let households actually repair their balance sheets.
UPDATE: In the meantime, low interest rates take income out of the economy. Their net effect is very unclear.
Labels: Bernanke has no clue