and Richard Caballero are discussing the idea that the Fed could make a huge “helicopter drop” of cash onto the Treasury as a way of stimulating the economy.
Here’s the idea from Caballero:
The economy is barely muddling through. While some of this is unavoidable given the magnitude of the financial shock that is slowly working its way out of the system, macro-policy still has an important role to play in preventing a relapse. Unfortunately, the Federal Reserve has the resources but not the instruments, while the US Treasury has the policy instruments but not the resources. It stands to reason that what we need is a transfer from the Fed to the Treasury.
That last part is key. Only the Treasury it would seem has the policy resources to actually make stuff happen in the economy.
But this idea of a pre-transfer (Salmon proposes the Fed hand future remittances in advance) is needlessly complicated. The Treasury doesn’t need a stockpile of cash on hand to spend.
A commenter on Salmon’s site gets it right:
I think you’re overcomplicating this issue. The “remittances” from the Fed to the Treasury are just the coupons on the US T-bills and bonds that the Fed is holding. If the Fed wants to finance deficit spending it can do that literally without limit, simply by buying all the bonds Treasury wishes to issue. No special approval or structure needed.
PragCap had a really good post on this question recently, noting that the Treasury basically spends first, then goes to the bond market:
The government bond market isn’t this great funding tool. It is merely a monetary tool that is used to control interest rates. This is important because it helps you to recognise the sequence of events here. We are spending first and then issuing bonds. The bonds are issued to control the level of reserves in the system which subsequently helps the central bank control interest rates (and and in theory, the amount of money in the system). This should show you again, that something is substantially different here from the way a household, US state or country in the EMU funds itself.
So the only question is: Does the Treasury have some way of spending A LOT of money without Congressional approval? Because if it does, then no Fed mechanism is necessary, and presumably the political gridlock is no longer an issue.
And in fact Treasury probably does have a mechanism, via Fannie and Freddie (at least) to take over much more of the housing market, and deliver cash to homeowners. That’s what the big rumour was earlier this month in fact, that Obama would find a way to push tons of cash to homeowners via the GSEs. So far the administration is denying this, but if Geithner and Obama want this, they can pull it off, have it financed by the Fed, and no GOP opposition should be an issue.
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