Via: The Fed's Anti-Inflation Exit Strategy Will Fail – Allan Meltzer in the WSJ
Prof. Meltzer demeans himself by even addressing the Fed’s ridiculous proposition that by paying interest on reserves the Fed can control excess reserves. Where is the reserves interest going to come from? This is just another underhanded way to try to recapitalize the bad banks (not all banks are insolvent).
Meltzer instead suggests the Fed use the traditional method of selling securities to suck in high-powered money. But what are they going to sell, and to whom (the “Wall Street question”)? The Fed has taken in untold and literally unknown amounts of garbage as if it were worth being reserves—they won’t even tell us what it is or how much of it has already charged off!
If and when inflation becomes a problem (when the next Big War gets going) the Fed won’t have the balls to reign in anything, would be my guess. And we know the Whole Sick Crew of neoclassical economic advisors to the President are on record as welcoming an inflation to “lower the debt load.”
In the meantime the only thing that will restore a healthy middle class to America is an explicitly redistributionist rebalancing of aggregate demand. Let the ruling class that has engineered the economy and the tax system to its own benefit for the past generation start to pay its own bills—especially the gigantic Wall Street bailouts, the largest transfer of wealth from ordinary Americans to the wealthy in history.
[I hate to admit it, but a rebalancing of aggregate demand that put more money in the hands of the middle class would also increase the odds of a “benign” mild wage-price inflation getting going. Combine this with a concerted effort to get big American corporations to knock their preening executives off their pedestals—who strut through the halls wearing expressions that say, “We are gods, oh ye puny cube-dwellers! Do not think that you are even the same species as we! You will never join our club!”—and get pay ratios in America back toward something that doesn’t cause gagging, and the economy might just pick up steam….]
Raise marginal tax rates on the super-rich to where they were in the 1950s (see this), the last time the federal debt load was this high.
I called my Senators today and told them to dump Bernanke.
P.S. The Fed always has reserve requirements to reign in excess reserves.
P.P.S. If the Fed had not bailed out the banks, and instead had provided unlimited deposit protection, what would have happened? There would be a large amount of high-powered money in the hands of the public rather than in the banks. The public could have made runs on as many banks as they liked, and the banks that lost their deposit base failed, and there would have been no massive wealth transfer to the investors in the failed banks—but the executives of the banks that levered up irresponsibly would be out of work, instead of cracking jokes to Congress about financial crises being something that come around every seven years, and paying themselves record bonuses. Would this have been inflationary? No. People are reducing their marginal propensity to consumer, and increasing precautionary demand for money. When things calmed down, they just would have put the money back in a bank.