Krugman Sees the Light and Calls on the Fed to Print $2 Trillion
Posted by Michael A. Kamperman on December 11, 2009
In this morning’s New York Times Paul Krugman called on Ben Bernanke to ratchet up the Federal Reserve’s efforts to create jobs by printing $2 trillion. Krugman says the economy needs to create 300,000 jobs per month for the next five years in order to create the 18 million jobs necessary to return to full employment. The Keynesian econonomist ruefully acknowledges the appetite for a full scale fiscal assault on the economic crisis doesn’t exist in Washington and he is turning to Bernanke and monetary policy as the nation’s best option to create jobs. Krugman states “the most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.” While Joseph Gagnon is on the right track he underestimates the size and scale of quantitative easing necessary to end the credit crisis. Consider that Goldman Sach’s estimates that every $1.4 trillion worth of government securities the Fed purchases is equivalent to lowering the Fed Funds rate by 1%. Goldman further estimated the Fed Funds rate needs to be lowered another 6% in order for monetary policy to have enough teeth to get the economy moving again. The Goldman study estimates the Fed needs to print $8.4 trillion.
While I think Mr. Gagnon’s estimate is way too low and that Goldman’s estimates are also too low I am thrilled that Professor Krugman has kick-started the debate about why isn’t the Fed printing more money and just how much money does the Fed need to print. My own estimate is we should start with $10 trillion, though it will probably take $20 trillion, and virtually eliminate all of the outstanding U.S. Treasuries. This shock and awe strategy would restore confidence because the federal government would be almost debt free. It would also mean our President wouldn’t have to go to Asia and bow down before his bankers. And, it would free the Congress from concerns about the deficit allowing them to send the states the estimated $350 billion they will need over the next two years to close their budget deficits.
Imagine a world where the too-big-to-fail-too-yet-too-broke-to-lend-banks have no risk free Treasuries to invest in and are forced out on the risk curve with no option but to lend again? It is up to the Fed to take the “hide the money under the mattress” Treasury bonds away from the institutions. We have seen several Treasury auctions this month where the winning bidders accepted zero interest just to know their money was safe. One auction had demand for over five times the amount of Treasuries auctioned even though there was no interest to be earned. If I ran an institution I wouldn’t want my money in a maybe too big to fail bank, or in Dubai or Greece either. For those worried about the dollar if the Fed takes the plunge you can bet the Japanese and the Brits will be quick to follow. We are in a global debt-induced deflationary depression and it is up to the U.S. to lead the way out. Mr. Bernanke, to whom much is given, much is required.
