Jul 23, 2011 at 3:39 pm
Q: Re the debt ceiling, why can’t we just print the money we need to meet our obligations?
A: In the first pieces I wrote on this mess, I noted that when a government’s debts are in that gov’t’s currency, you could theoretically “monetize the debt,” i.e., print your way out of it. But I thought it was a bad idea and still think so.
[Allow to add proudly that my 9-yo kid suggested this same idea the other day...I still don't like it, but am very proud of her for coming up with it on her own. She's been on a field trip to the mint where they print sheets of currency, so I guess she just put two and two (raised to the Nth power) together.]
You’d be paying back debtors in inflated dollars so interest rates would have to soar on new borrowing, and I doubt the risk premium associated with this idea would be temporary. Such a move could increase the cost of borrowing for many years to come and thus do long-term, fundamental damage to the potential growth of our economy.
Dean Baker and his frequent colleague Ron Paul (!?) agree that we could get some ceiling headroom it the Fed would just retire some of the debt it owes the government—burn the IOUs (T-bills) it holds back from when it was buying them up hand over fist as part of quantitative easing.
Definitely clever, but a) the Fed wouldn’t do it, and b) I’m not sure it’s legal. Someone should check, but I believe the Fed’s charter prohibits the destruction of its assets, even when they’re just kind of weaved out of thin air (e.g., as opposed to say bonds owed to Social Security).
There’s no easy way out of this…oh wait…Congress could legislate the higher ceiling as they’ve done over 70 times since the 60s with no freakin’ big deal—including President Reagan 18 freakin’ times.
Q: Aside from whether the Recovery Act was large enough, could it have been composed of more effective measures?
A: Well, the process by which such bills become laws always means that in getting the votes you need, you can’t let the best be the enemy of the good. That said, we should have:
–kept the damn AMT patch, around $80 billion, out of the thing. Would have had to been passed anyway and provided zero fiscal boost, so just took up valuable space.
–less tax cuts, more direct jobs. I’ve stressed this elsewhere—the tax cuts that went to working folks, like Making Work Pay, surely helped, but even the well-targeted cuts are indirect job creation measures. You hope the extra money is spent, not used to deleverage, and doesn’t leak out on imports. But you can’t be sure.
State fiscal relief was more direct and had a solid record in job preservation—which you can see fading fast as Recovery Act funds dry up—so I might have moved some spending out of tax cuts and into more state fisc.
I would like to have tried more direct employment ideas, like FAST!, and in fact, we had something like that in the original bill but a Senator whose vote we needed said ‘no.’
That’s what I mean by politics.
–maybe tried to get mortgage cramdown on primary residences in the legislation, but this probably would have made an already very heavy political lift impossibly heavier.
Q: Re this idea of Fannie and Freddie keeping their foreclosed stock off the housing market (and on rental market), why is the gov’t not being a landlord a useful policy wrinkle?
A: Two reasons. First, by federal gov’t, I think we both mean Fan and Fred here, since a) they own these foreclosed properties, and b) “they” is 80% us. They would of course contract out the landlord function, as they’re already contracting out upkeep of these properties.
What’s gained by keeping the properties on their books? Maybe once their prices appreciate, Fan and Fred could sell them and make back some losses.
But that could take a long time, and it’s cleaner to turn them over to investors. Even with the landlording contracted out, it still means that federal gov’t has a new function as overseeing the contractors that Fan and Fred hire to oversee the project. Feels messy to me with lots of downside risk.
But I don’t feel strongly about it—that’s why I called it a wrinkle.
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