Finally, A Proven Plan for Economic Recovery

Sheila Bair, former FDIC chair, has made the following proposal (WaPo), in part, to illustrate the absurdity of what we view as sound economic policy.

The set up:

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

The delivery:

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Of course, this brilliant plan would solve multiple problems, ranging from that pesky 1 percent (we would all be 1 percent) to education and social welfare (who needs it, if we are all members of the investing class). As for the long-term fiscal implications (not that anyone cares any more), we could simply print more money.

If it works for the financial community…why wouldn’t it work for the rest of us. This summer could be “recovery summer.”

Well played, Ms. Bair.

5 thoughts on “Finally, A Proven Plan for Economic Recovery

  1. This is printing money. The amount is in the quadrillions.

    I am surprised that she really thinks the Fed is lending lots of money at low interest rates to people buying long term bonds.

    In reality, the Fed is paying low intrerest rates to banks so they won’t lend and using the Funds to purchase long term bonds (and mortgage backed securiteis.)

    Banks are borrowing a good bit from ordinary depositors at very low interest rates and while some of that is being lent to the Fed, also at very low interest rates, some of it might well be lent longer at 2%.

    Spending on output remains well below the trend of the Great Moderation. While it is possible that a credible committment by the Fed to see spending increase would result in higher short term interest rates and paradoxically allow a decrease in the amount of money created by the Fed, this still would require a committment by the Fed to create more money if necessary.

    Bair’s notion that this is all about making loans at low interest rates is sad, really. And she was in charge of FDIC.

  2. Though funnier than the normal, this is just another top-down solution from another top-down solution provider…

    For a long time now you have forced by means of capital requirements for banks based on perceived risks, to discriminate against those officially perceived risky, like small businesses and entrepreneurs. As a result you have got yourself saddled with dangerous obese bank exposures to anything that is or was officially perceived as not risky, like the triple-A rated and the “infallible” sovereigns.

    And so why do you not instead allow bottom up solutions to work easier, by removing those odious regulatory subsidies to those who are already being subsidized by the markets and banks because they are perceived as not-risky, and thereby remove those odious regulatory taxes that hurt those perceived as risky and who are already hurt because of that by banks and markets.

    Did not Mark Twain teach you sufficiently that “bankers lend you the umbrella when the sun shines and take it away when it rains” for the bank regulators also pinching the bankers to do so?

  3. If we are all rich,who is going to be left to do the work? Perhaps an easier solution is to have a minimum wage of $100.00/Hr. Of course, after all this money printing the currency will be worth next to nothing and will not buy very much. But on paper, we’ll all be millionaires.

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