Our economy’s journey to becoming Japan will take one giant step forward if former IMF chief economist Olivier Blanchard has his way. His "outside the box" solution for our next recession? The Fed should buy stocks, finance the federal deficit and buy goods. He detailed this thought provoking idea at the Boston Fed’s monetary policy conference that took place this past weekend.
This thinking comes as a result of a "general sense [that] the Fed has to re-think its approach to combating recessions," according to a new MarketWatch article.
Why must it re-think its approach? Because the Fed itself has eliminated most of its tools used to fight recessions by keeping the United States in a lower interest rate environment for too long, instead of raising rates as the market roared. Now we have a stock market at all time highs and record debt levels yet again - but this time with a Federal Reserve that has far fewer options to combat the next recession than it ever has had in the past and with a neutral rate of interest that is lower than it has ever been in the past.
Fascinatingly enough, economists are only now starting to realize that this lack of firepower could be a detriment to the Federal Reserve in the future. Blanchard stated over the weekend that the Fed could probably handle a small recession, but a more major recession, like the one we experienced in 2008, should prompt the Fed to resort to "previously unheard of policies".
When interviewed by MarketWatch, Boston Fed President Eric Rosengren stated that he wasn’t sure there would be support for this type of monetary policy, as Blanchard was describing it. We'd be interested in revisiting his answer in the midst of a crisis.
Rosengren went on to say "We definitely have tools. The question is whether we have the sharpest tool in the shed and whether we’re going to be able to deploy them."
Allow us to be the first to guess that they do not have "the sharpest tools in the shed", in more ways than one.
Apparently convinced that two wrongs do in fact make a right, Rosengren then stated he would be "a strong advocate" of QE the way that we know it best: asset purchases and rate cuts. Such a cavalier attitude about this type of damaging monetary policy belies the larger problem of the Fed's balance sheet, which stands at over $4 trillion with no signs of lightning up in any material way.
But Blanchard doesn’t seem to think that this $4 trillion dollar balance sheet is even a problem. "If we need it, we could clearly double it and nothing terrible would happen," Blanchard reportedly said.
He concludes that he is not sure why people believe the Fed should only buy assets, but not goods.
“We have this notion that it is only OK for the central bank to buy assets and not goods. But that’s a restriction we imposed on ourselves,” Blanchard is quoted as saying.
Yes, how bizarre that the Fed doesn't buy, say, baseball cards to boost the "wealth effect" at the card collector level, or maybe Tesla Model 3s, just because.
Of course, Neither Blanchard nor Rosengren seem to realize that the reason we are in a place where central banks had to buy $15 trillion in assets to begin with is because the Fed and this type of thinking has put us in to begin with. What will this discussion look like in another 10 years, after the next crisis? We don’t know, though we are sure every problem we'll be dealing with by then will be exactly what we deserve.