What We Should Be Debating

We should be debating:

1. Whether to cut the fed funds target from 0.25% to 0%
2. Whether to put an interest penalty on excess reserves
3. Whether to do additional QE
4. Whether to set an inflation or NGDP target
5. Whether to target growth rates or levels
6. And of course the key overarching question:  Would the economy benefit from an increase in AD, or nominal spending?

Instead, the blogosphere is full of debate over whether Bernanke should be reappointed at the Fed.  Obviously President Obama gets to choose the Fed Chairman; if he thinks the economy would benefit from additional monetary stimulus, then I presume he would not have picked Bernanke.  Thus I don’t much care either way whether Bernanke is reappointed.  If he is not reappointed then I presume Obama would replace him with someone holding similar views.

I think we need to step back and think about how the Fed operates.  You cannot expect leadership from a large bureaucracy.  Unless there is dissatisfaction with Fed policy among economists, pundits, journalists, businessmen and politicians, you cannot expect the Fed to suddenly change its policies.  As far as I can see, very few people are calling for additional monetary stimulus.  So why should we expect the Fed to provide such stimulus, with or without Bernanke?

It seems like lots of the discussion of whether Bernanke should be reappointed revolves around issues other than monetary policy.  And I think that fact tells us a lot about how we got in this mess; many people still don’t seem to think the big drop in NGDP was a monetary policy failure.

Instead we have debates about whether to allow big banks to exist.  Again, doesn’t this miss the point?  If our banking system absorbs trillions in losses you can be sure the government will step in, regardless of whether we have big banks or small banks.  And if our banking system isn’t in crisis, then FDIC is perfectly capable of handling an isolated bankruptcy, even at a large bank.  In any case, I can’t imagine a future where the US doesn’t have any large banks, but Europe, China, Japan and Canada have lots of large banks.  Can you?  Wouldn’t it make more sense to try to prevent the banking system from suffering trillions in losses after a bubble bursts, perhaps by requiring sizable downpayments?

But then I read that the FHA is about to set much tougher standards for FHA mortgages—they plan to require borrowers with a 590 credit score to put down at least 3.5% downpayments.  As Tyler Cowen recently argued, you knew Congress wasn’t serious about global warming when they refused to make Americans pay more for gasoline.  And I would add that you can be sure that the populists who want to “re-regulate the banking system” aren’t serious when all they can do is talk about 3.5% downpayments for bad credit risks.  It is so much more fun to bash big banks.

PS.  In this article David Henderson suggests a better way of imposing discipline on banks; get rid of FDIC.

On a more positive note, Barney Frank now proposes that we eliminate Fannie and Freddie:

A top House Democrat on Friday said his committee was preparing to recommend “abolishing” mortgage-finance giants Fannie Mae and Freddie Mac and rebuilding the U.S. housing-finance system from scratch.

And later on there was even better news:

One such report came from analysts at Standard & Poor’s this past week. “It’s hard for us to imagine” how enough capital could be attracted to replace Fannie and Freddie with stand-alone private companies that would be able to offer low-cost funding for 30-year fixed-rate mortgages, the analysts wrote.

Now I’m getting really excited.  Not “enough capital” for lots of low-cost 30 year mortgages?  Please God let’s hope these “analysts” are correct.