Thursday, November 4, 2010


The Fed announced yesterday that it would embark on a new round of quantitative easing, aka QE2. NPR has an excellent explanation of what their statement means and what QE is. Or you can read Bernanke's WaPo op-ed. Long story short, the Fed created $600bn out of thin air and is using it to buy treasury bills in an attempt to drive interest rates down even further and bump inflation up a bit.

I have a better idea. Also a completely unfeasible one, since it requires congressional action. But still better. I'll keep the numbers the same for simplicity's sake.

The Treasury issues $600bn in new T-bills. The Fed creates $600bn out of thin air, and buys those T-bills. Suddenly the government has $600bn in new money to play with. $300bn goes to pay for infrastructure upgrades. Put people to work building roads, railways, bridges, fiber-optic broadband, and sewer systems. Take the other $300bn and drop it from a helicopter. Send every American a $1000 check. Even if they all use it to pay down the debt they're in, it will at least speed up that process. Some, hopefully, would go buy stuff. If people buy more stuff, businesses can hire more people, who can then buy more stuff, etc. Those construction workers who don't have new homes to build can get jobs building bridges, etc. They now have more money than unemployment was giving them, so they can pay down debt and buy stuff.

Just as importantly, the Fed will have just printed $600bn and injected it right into the heart of the real economy. This may cause inflation. Good! Inflation is at 1% right now, it should be higher. Higher inflation (~3-5%) will get people out of debt faster. It will make real interest rates drop below zero, making securities a bad idea, and pushing businesses to expand instead of sitting on cash.

And best of all, the Fed could just choose to immediately forgive the debt from those $600bn in T-bills. Since that money was created out of thin air, the US doesn't owe it to China, and it doesn't get added to the national debt. It may weaken our currency, relative to other world currencies. Good! That makes our exports more competitive abroad and makes American-built products more competitive with imported goods at home.

Obviously, this is a bit silly. But the economy is still pretty fucked, so it would be nice for policymakers to think outside the box a bit.

UPDATE: Yglesias writes something similar today:

As it happens, I don’t like that idea a huge amount at this point. I think what we should be looking to do is to give the money directly to households. Instead of creating money and using it to buy $600 billion in bonds, create money and use it to send $2,000 to each American. That’s an approach that would be superior from a humanitarian standpoint even if it didn’t ultimately produce macroeconomic gains, and it would also have more political legitimacy.

UPDATE 2: Karl Smith, sitting in for Ezra Klein, also wouldn't mind a helicopter drop:

A number of economists are concerned that the Federal Reserve can't on its own stimulate demand. I am skeptical here, but with unemployment holding steady at 10 percent I am more than willing to consider alternate strategies.
The most straightforward would be what economists nicknamed the Helicopter Drop. At its core this means that Federal Reserve would print money and the IRS would mail that money to people as checks. It would be as if we dropped money on the nation from helicopters.


  1. So the lame duck Congress somehow overcomes a Republican filibuster, the Fed prints $600 billion and gives every taxpayer $2000 or spends half on infrastructure, what is the downside? How much inflation might it cause?

    As large an amount as $600 billion is, it is still a drop in the bucket to our economy. It shouldn't cause runaway inflation. Plus your average American rarely thinks about tomorrow anyway. They won't be concerned about inflation in 2012 or 2013 or 2014. We Americans want what we want and we want it now.

    So we forgive the debt and our currency loses some value. Aren't we upset with the Chinese because they are keeping the value of their currency artificially low? Lowering the value of the dollar would certainly help us sell more exports to the 1 billion people in China.

    I don't see much downside. I would think the majority of Americans, the 98% who don't make over $250K, would spend their $1,000 - $2,000 check and buy a washing machine or a TV or take a vacation. Target and WalMart would love it. Personally I have my eye on a duffle bag that is made out of baseball glove leather. It is way overpriced at $575 but if I got a check that I need to spend to help Americans get back to work, it's my patriotic duty to buy it!

    Desperate times call for desperate measures. All we have to do is get the Democrats to sell this idea to the American people. Damn! The Democrats couldn't convince thirsty people that they should drink some water. Oh well, never mind.

  2. On China: I didn't expand on this in the post, but unilateral action to cause inflation and drive our currency value down a bit will cause China to have to make some tough choices. The way they peg their currency to ours is by buying up lots and lots of US debt. If we force our currency down, there will be repercussions in their domestic economy if they try to keep pace. I don't think $600bn would be enough to do serious damage, but it could make them stop and think.

    The really sad part about all this is how utterly stupid the GOP has become when it comes to macroeconomics. One of the recent talking points has been that QE2 is bad because it weakens our currency. THAT'S THE WHOLE POINT. I guess some focus group told them that "weak currency" sounds bad. But weak currency means more exports and fewer imports, and that is a GOOD THING.

    As to whether or not people would spend it, yeah, lots would, but many would be like Charlie in West Wing and pay down their credit cards. America is going through some harsh deleveraging and it's depressing consumer demand. Like Bartlett said "It wouldn't have killed ya to buy a DVD player?" But frankly, we need to get through that process, so speeding it up is also a worthy goal.

    But yeah, at the end of the day, I can't see this getting 60 votes because... well, I don't really know why, but the Senate seems unwilling to take action on the economy in a meaningful way.