Ample Ammunition

 

There exists concern among many that should another recession come soon, the government will have few, if any, tools to bring the economy back towards growth and prosperity because interest rates are already near rock bottom. As a result, it is feared that our economy could quite possibly remain in the doldrums for some time. Fortunately, this is simply not true. There remain numerous tools at the disposal of the Fed and of the Congress. Below are some ideas that are surely being considered should more intervention become necessary.

To begin, the central bank could once again ramp up its purchases of Treasuries and mortgage-backed securities (MBS) through another round of quantitative easing. But rather than sticking to just Treasuries and MBS, this time the Fed could buy a much broader range of assets, including high-yield bonds, stocks, and even real estate to get asset prices up and markets out of the doldrums.

Another step the Fed could take is to push interest rates into negative territory, meaning it would start charging, yes charging, banks to keep money on deposit rather than paying them the current rate of 0.5%. While this seems preposterous, at present central banks in Denmark, Japan, Sweden and Switzerland, along with the European Central Bank are doing precisely this. The aim would be to encourage banks to lend by penalizing them to hold cash. In a similar vein, the Fed could alternatively pay banks to lend money to borrowers. This policy is less harmful than using negative interest rates, as it does not reduce bank profits nor does it encourage banks to charge their depositors to keep deposits on hand to recoup the money paid to the Fed. Paying banks is akin to using a carrot, lower rates; a stick.

In addition to the above, the Fed could also promise to keep mortgage rates at or below a certain level for an extended period of time with the explicit aim being to boost lending activity by enabling more people to qualify for a mortgage. This would boost home sales and residential construction activity.

Another way to boost spending and inflation is for the government to announce a tax cut and issue bonds to finance it. But, rather than selling the bonds to private investors (which takes money out of circulation), the Fed would buy the bonds. This “Helicopter money” (HM) named in honor of Milton Friedman and which fuses fiscal and monetary policy, is as close as you can get to raining cash from the clear blue sky like manna down on households. While HM is not to be rushed into, in a deep recession or global crisis, it might well make sense. And, if it were coordinated by a group of rich countries, all the better.

Lastly, the Congress could surprise us and use fiscal policy and pass structural reforms. Fiscal policy such as large tax cuts or spending on large infrastructure projects would give private sector firms more confidence about future demand and thus make a recovery more likely. Structural reforms could include tax reform and increased deregulation.

In short, the government is far from being out of policies that could be employed to jump-start the economy in the event of a recession in the near future. While some policies will undoubtedly work better than others, the key will be to implement a number of them at once.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.

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