Not long ago, the CMFA staff and I were preparing to officially launch The Menace of Fiscal QE, my book aimed at countering efforts to have the Fed undertake or otherwise fund off-budget government spending programs.
Then came the crisis. Of course our plans were dashed. But so, I feared, were my hopes of having people take the message of Menace seriously. “Who now,” I wondered, “wants to hear about the need to respect policy boundaries? More likely the hue-and-cry will be, ‘Let’s pull all the stops: boundaries be damned!’ ”
And so it has come to pass, in some quarters at least. Thus Congresswoman Maxine Waters, Chair of the House Committee on Financial Services (D‑CA), declared on March 16th:
This is in many ways an unprecedented crisis which calls for extraordinary federal response. Unfortunately, the Fed appears to be using its old playbook in trying to calm funding markets by flooding them with liquidity. During this time of economic turbulence, it is critical that the Fed go beyond these steps and provide much-needed support to those who are on the front lines of this pandemic. …While Congress works on a bold, fiscal stimulus package to help these individuals, I call on the Fed to reevaluate its response and work creatively to address the needs of everyday Americans.
Some experts, in the meantime, are recommending that the Fed resort to “helicopter money.” Jordi Gali, for example, suggests that it and other central banks finance emergency spending programs by simply crediting their governments’ accounts:
That credit would not be repayable, i.e. it would amount to a transfer from the central bank to the government. …[S]uch a transfer from the central bank to the government would be equivalent to a commensurate purchase of government debt by the central bank, followed by its immediate writing-off, thus no longer having an impact on the government’s effective debt liabilities.
Gali recognizes that his plan subordinates monetary policy to “the requirements of the fiscal authority” and that it could therefore be considered “an outright violation of the principle of central bank independence.” “But,” he says,
we have seen many occasions in which rules that were considered sacred have been relaxed in the face of extraordinary circumstances. …Furthermore, the central bank could agree to participate voluntarily in such a scheme, thus preserving its formal independence.
Perhaps I am reading this wrongly, but Gali seems to be saying that central banks need never worry about losing their independence so long as they do whatever the government asks them to do.
Notwithstanding such appeals, and the urgency of the crisis, I believe that it’s as important as ever for the Fed and Congress to stick to their respective fiscal and monetary turfs, and that if there’s any reason why they can’t do so, while taking all necessary steps to address the crisis, it’s that Congress refuses to take responsibility for any potentially risky operations it would rather have the Fed undertake.
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