Time to go unconventional?

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1. Fed needs to lend unsecured to any member bank in unlimited quantities and set term as well as ff borrowing rates.

This will normalize bank liquidity, and should have been done as soon as we went off the gold standard domestically in 1934(?).

To keep solvency accounting with FDIC the FDIC can insure all fed deposits at member banks.

This does not ‘create money’ or ‘inflation’ or have any macro economic effect beyond normalizing liquidity.

2. Congress needs to declare a ‘payroll tax holiday’ and drop the regressive social security and medicare deduction rates to 0% to restore demand from the bottom up.

This increases take home pay and cuts costs for business some, allowing both the means to make their payments to the financial sector and support it via reduced delinquency and rising credit quality.

It will also support growth and employment as the higher wages are also spent on real goods and services.

As this happens banks will very quickly resume lending to corps either directly or via commercial paper.

If people want to work and produce and not spend their income (for any reason) the government can either ‘spend it for them’ or increase their income via tax cuts until they spend sufficiently.

And don’t forget the need for an energy policy to prevent any recovery from merely driving up gasoline prices.

>   On Tue, Oct 7, 2008 at 9:19 AM, Davidson, Paul
>    wrote:
>   Good comment — but what is the most unconventional thing
>   the FED can do? I think by now the FED can only prevent
>   things from getting exceedingly bad– but bad it will get–
>   What we need now is fast fiscal policy– but until a new
>   administration comes in, I do not see that happening.
>   Anyone got something in there head that can save the world?
>   By the way did you see Bill Black’s wonderful performance in
>   the Obama Keating 5 video released yesterday?

>   Sent: Tue 10/7/2008 12:10 AM
>   The U.S. economic data began to show signs of an outright
>   cumulative contraction before the September/October credit
>   crisis.
>   The September/October events are a massive shock to the
>   system. The only thing I can compare it to is the combination
>   of a 20% Fed funds rate and a call for curbs on credit card use
>   in late winter 1980. In the months that followed aggregate
>   demand fell faster than at any time in the post war period.
>   I believe the Fed realizes all of this.
>   Bernanke realizes that if income falls the financial crisis, already
>   almost unimaginably severe, will also get much worse.
>   Fed Chairman Bernanke went before Congress and said that if
>   the Paulson Bailout Bill was not passed and the stock market
>   fell, there would be economic Armageddon. The Bailout bill has
>   passed. The stock market has fallen. Credit spreads have
>   widened. Based on Bernanke’s own public statements, he
>   should be thinking we are entering economic Armageddon. I
>   believe there is a raging hedge fund crisis, knowledge of which
>   is being suppressed. There are other unrecognized crises. I
>   think the Fed is aware of all of this.
>   Meanwhile, the Fed has not changed its policy rate. But in
>   fact, Fed funds have been trading below the policy rate

>   target. Also, the Fed is expanding its balance sheet in a
>   spectacular way, and it has announced this morning that it will
>   expand it much further with newer, larger auctions.
>   It would seem that Rome is burning and the Fed is fiddling. It
>   is my assessment that the Fed sees more of the burning than
>   we do. It realizes that all the conventional policy responses do
>   not fit the current monstrous circumstances. It is being held
>   back because it must come up with a more dramatic policy
>   response that we can conjure out of the precedents from the
>   past.
>   Forget coordinated rate cuts. If it happens it will be cosmetic.
>   Japan has almost no interest rate to cut. The ECB will, but
>   Europe will prefer to resort to government guarantees of bank
>   deposits and will not hesitate to quasi nationalize banks.
>   The Fed has no more time to stay its hand. Something will have
>   to be done very shortly.
>   Based on Bernanke’s writings of the past several years, I would
>   expect a shocking policy change from the Fed which will
>   probably result in an almost unimaginable increase in its balance
>   sheet.