In a post today Jim Hamilton comments on the Fed´s balance sheet.
On the Fed´s emergency lending:
Some have criticized the Fed’s emergency lending on the grounds that the Fed took all these extraordinary actions and yet the economy still performed very badly in 2008:Q4 – 2009:Q2. I think this misses the point. I don’t believe that it was ever within the Fed’s (or anyone else’s power) to bring the economy quickly back to full employment. Instead, the purpose of the Fed’s emergency lending was to prevent a very bad situation from becoming even worse than it needed to be. The evidence we now have suggests that the Fed indeed accomplished exactly this.
On the Fed´s significant growth in holdings of U.S. Treasury securities, debt issued by Fannie Mae and Freddie Mac, and mortgage-backed securities guaranteed by Fannie and Freddie:
These measures, too, have been criticized on the grounds that, despite QE1 and QE2, the economy continues to disappoint. And here again, I think the critics have missed the point. I again maintain that it is not within the Fed’s power today to bring the economy quickly back to full employment. I nevertheless also believe that deflation– an outright decline in wages and prices– would make our problems even worse. For this reason, I have been a supporter of the Fed now moving ahead with QE3, though my expectations for what this will actually accomplish are low.
Let me understand. By its monetary policy mistakes the Fed has the “power” to crash employment but is powerless to take corrective monetary policy actions? And furthermore, Jim Hamilton has low expectations for what can be accomplished by the Fed´s actions! He´s not wrong to have low expectations, because so do I, unless the Fed undertakes QE3 within a NGDP Level Targeting framework.
The chart shows that back in the early 1980s Volcker got things going after the recession by driving nominal spending much higher, something that Bernanke ‘refuses’ to even try after allowing it to crash after mid-2008!
And back then, inflation continued to trend down even after spending ‘shot-up’. But Bernanke has strong longstanding views, both on inflation targeting and the credit channel (see here for a primer).
Hamilton’s reasoning is weak.
Better questions to ask are, “Is the secular downtrend in sovereign interest rates reversible?”
If not, then, “Is QE a conventional policy?”
If so, then, “What do we do with central bank balance sheets, which are bound to swell.”
I contend it is a wonderful problem to have.