Sunday, June 6, 2010
If I were Fed Chairman, here's what I'd do...
Even though Congress holds the key to economic prosperity, it is content to sit by idly, frozen by irrational deficit fears as millions of people remain out of work and as our economic product withers.
The Fed has tried to counter deflationary forces by putting interest rates down to zero, but this has done little.
There is, however, something very powerful the Fed can do to create prosperity again and if I were Fed Chairman this is what I'd do: The Fed should support the stock market by aggressively buying stocks. This is something the Fed can absolutely do as stipulated in Article 13 paragraph 3 of the Federal Reserve Act.
Buying stocks would act as a funding mechanism to businesses that are struggling because banks are not lending. It would also provide a "wealth effect" to households, which hold about as much stock as real estate. That wealth effect would translate into higher consumption and higher GDP and, eventually, the increased economic activity would cause the banks to lend again and the Fed could step out.
The problem is, the Fed will NEVER do this as it is considered too unorthodox (as if buying Bear Stearns' assets was not unorthodox) and if it did do it, I'm sure it would create some global outcry about how it is sowing the seeds of hyperinflation. (The line thrown out every time gov't or the central bank tries to sustain output and employment.)
However, if the Fed bought stocks it would be an easy way to circumvent Congress's intractable position on deficits and the subject of further stimulus spending. It would not add to the deficit and it would provide money directly to the private sector to invest and spend as it sees fit, without government direction. (A point that bothers lots of people.)
Furthermore, it would be much more effective than keeping interest rates at zero, which is doing absolutely nothing.
If I were Fed Chairman, that's what I'd do.