$8 Trillion of Fed Action?

[Kurt_and_Hunter]

If this was a normal situation the Fed would cut interest rates about 6 points to match what has been happening in the economy. But we are already at zero. The Fed cannot cut interest rates at all. And the money equivalent of cutting interest rates is much, much larger than seems to be generally appreciated by commentators.

For the Fed to pick up through other methods the slack of the needed-but-impossible 6 point interest rate cut we need costs roughly $1.3 Trillion per point. Recognizing the scale of the problem posed by the Fed being out of bullets is necessary to putting federal spending and tax cutting stimulus in the proper perspective. The federal government is no longer a whip to drive the horse of the mighty economy. The federal government is now the horse itself, and a horse dragging a load of asset destruction that is larger than itself. So we need to feed the poor beast whatever it takes. (While John McCain says we need to put the horse on a diet!)

Not so easing (wonkish)
Paul Krugman
March 11, 2009

There’s been a fair bit of buzz about a Goldman Sachs report (no link) suggesting that the Fed’s policy of “unconventional easing” — buying up lots of assets other than the usual Treasury bills — isn’t very effective. Specifically, GS estimates, based on market responses to Fed moves to date, that it would take between $1 trillion and $1.6 trillion of unconventional easing to accomplish as much as the Fed can achieve, in normal times, by cutting the Fed funds rate by 1 percentage point. And since GS’s estimate is that the Fed funds rate “should” be -6 percent, this means that the Fed has a problem.

One thing Noam Scheiber doesn’t mention in his summary above is the extent to which this result, if true, strikes at the heart of Ben Bernanke’s strategy for dealing with the crisis.

Intellectually, Bernanke and the Fed were prepared for this crisis — they have been gaming out what they would do if “it” happened here for years. And a key element of the strategy was altering the composition of the Fed’s balance sheet — that is, unconventional easing.

But that tool isn’t proving very potent.

http://krugman.blogs.nytimes.com/2009/03/11/not-so-easing-wonkish/

[Kurt_and_Hunter]

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